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Subrogation in environmental contamination litigation

Subrogation claims by insurers often play a role in a dispute over allegations of environmental contamination

Insurers may already be aware of the importance subrogation plays in environmental contamination litigation. Subrogation allows insurers to stand in the shoes of insureds to obtain recovery from a third party who is at fault for the environmental contamination or hazard. While subrogation has been around for a long time (the principle of subrogation was taken from old Roman law), it is playing an increasing importance in environmental cleanup cases.

However, subrogation can be a complicated and contentious legal issue. This article explains subrogation in environmental litigation in the context of an important recent Federal Court of Appeals decision.

Subrogation basics in environmental contamination litigation

In many environmental claims, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA or Superfund) provides for the right of subrogation for insurers who issue Pollution Premises Liability policies. Specifically, CERCLA provides that “[a]ny person . . . who pays compensation pursuant to this chapter to any claimant for damages or costs resulting from a release of a hazardous substance shall be subrogated to all rights, claims, and causes of action for such damages and costs of removal that the claimant has under this chapter or any other law.”

Put more simply, an insurer is entitled to obtain compensation after paying out an insured for environmental contamination. However, there are requirements the insurer must meet in order to recover on a subrogation claim. Namely, an insurer must prove:

•· The insurer paid out on the environmental contamination claim

•· It was not a voluntary payout

•· The insurer is secondarily liable for the payment

•· There is no injustice if the amount is recovered

Recent case illustrative

A recent case in a Federal Court of Appeals demonstrates how litigation can arise in the context of subrogation under CERCLA. The 9 th Circuit Court of Appeals held last year in Chubb Custom Insurance Company v. Space Systems/Loral, Inc. that an insurer could not recover under CERCLA because the insured did not pursue a claim against the potentially responsible party.

The case arose when Chubb paid out a claim under a Pollution Premises Liability (“PPL”) policy. The insured had purchased land used by Ford Aerospace. Several years later, the insured discovered that the land was contaminated. Chubb paid out the insured $2.4 million to offset costs of the cleanup.

After paying out, Chubb sued Ford Aerospace, claiming it was liable to reimburse Chubb for the money it paid to its insured. However, the District Court dismissed Chubb’s action, finding that the insured was not a “claimant” for purposes of CERCLA. In other words, because the insured did not first seek reimbursement from Ford Aerospace, Chubb did not have any subrogation rights.

Questions on subrogation rights or insurance defense?

Insurers and potentially responsible parties concerned over liability for allegations of environmental contamination should contact O'Connor First, P.C., a New York law firm specializing in insurance defense and environmental contamination cases.

Keywords: Subrogation, insurance litigation, environmental contamination, CERCLA.

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