The Supreme Court Revisits the Meaning of Damages in a CGL Insurance Policy

By Jon G. Furlow

It is the hallmark of insurance litigation to quibble over the meaning of words and phrases which to most seem at first glance to be quite clear. But look hard enough (and glance at the size of the policyholder's claim) and words can assume many meanings. Nowhere is this more common than in insurance disputes over environmental claims.

The Wisconsin Supreme Court added another twist to the world of environmental insurance in its recent decisions in General Casualty Co. v. Hills ¹ (Hills) and Wisconsin Public Service Corporation v. Heritage Mutual Insurance Co. ² (WPS) that refined the scope and meaning of the word "damages" in a standard form comprehensive general liability (CGL) insurance policy. In cases that call into question the continued vitality of the court's controversial decisions in School District of Shorewood v. Wausau Insurance Companies ³ and City of Edgerton v. General Casualty Co.,⁴ the court announced in unanimous decisions that businesses which are liable to a nongovernment party for costs to investigate and remediate contamination can look to their CGL insurance policies for coverage to pay the losses. Along the way, Chief Justice Abrahamson made it clear in her concurring opinion that it was time to overrule Shorewood and recognize the limited application of the City of Edgerton decision.

Hills and WPS provide some clear guidance that will be useful when handling future environmental claims. But first, a review of the policy language and the Shorewood and City of Edgerton cases will put the recent decisions into context.

History: Insurance policies, Shorewood and Edgerton

The decisions in Hills and WPS interpreted the scope and meaning of the word "damages" - a word commonly used in the insuring clause of standard form CGL insurance policies to describe what the insurance company will pay. The typical CGL insuring clause reads:

"The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of

"A. bodily injury or
"B. property damage
"to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit seeking damages."

The meaning of the word "damages" is important in two respects: 1) in order for the insurance company to become obligated to pay for defending the claim against the policyholder, there must be a "suit seeking damages"; and 2) regardless of whether there is a "suit seeking damages," the insurance company still must indemnify the policyholder for bodily injury and property damage if the policyholder is obligated to pay "damages."

One would think that such an important word would have a clear meaning. Not so.

In most cases, the word "damages" is not defined in insurance policies. Thus, it is not surprising that insurance companies and policyholders nationwide have bitterly disputed the meaning of this undefined word, particularly in the context of environmental claims. Across the nation, courts regularly decide disputes over the meaning of this word. Clarity is not a hallmark of these decisions. And although the trend seems to be that environmental costs are considered "damages," the courts are inconsistent: some find that environmental investigation and response costs are "damages"⁵; others conclude the opposite.⁶ The distinction is important because the costs to defend environmental claims can be enormous and the indemnity payments on them can reach into millions of dollars in damages.

The Wisconsin Supreme Court joined the debate over the meaning of "damages" in Shorewood, a case that did not involve an environmental claim. In Shorewood a school district was sued for declaratory and injunctive relief arising from racial segregation. The school district sought to recover its costs of defense and indemnity under its CGL insurance policies because the lawsuit against it was a "suit seeking damages." At first the court agreed, issuing a four-three opinion authored by now Chief Justice Abrahamson.⁷ Concluding that the word "damages" should not have a technical meaning, but should be read broadly to accommodate the reasonable expectations of a layperson who was purchasing the insurance, the court determined that from "the viewpoint of the lay insured, the term as thus defined could reasonably include all monetary relief necessary to remedy a legal wrong."⁸

Put another way, so long as a claim is made against the policyholder that requires it to pay money to remedy a legal wrong, there are "damages" within the meaning of a CGL policy. This meant that the Shorewood school district could recover its defense costs under its insurance CGL policy, and the CGL policy would cover the costs of complying with the injunction and paying the plaintiff's attorney fees, which were authorized by statute. That decision, though, was short-lived as the court completely reversed itself three months later on rehearing.

In an opinion authored by Justice Callow (one of the original dissenters), and over the dissent by Justice Abrahamson, the court held on rehearing in Shorewood that the scope of the term "damages" is more limited. Rather than extend to all monetary relief necessary to remedy any legal wrong, the court decided that the term "damages" is limited to compensation for past wrongs, not the costs of complying with an injunctive decree which is preventive in nature.⁹ The original opinion by Justice Abrahamson was withdrawn and replaced by Justice Callow's opinion.

As a result of Shorewood, the defense costs for a preventive injunction action were not covered, nor were the prevailing party's attorney fees covered, nor the costs of complying with the settlement agreement from the litigation, such as costs for remedial education programs. The Shorewood court also anticipated the problem of environmental costs. The school district had argued that coverage for environmental cleanup costs (permitted at the time by many courts outside of Wisconsin) was analogous to coverage for remedying past racial segregation. The court declined to address that issue. Noting that the issue had never been addressed by a Wisconsin court, the Shorewood court decided that "such an important issue should not be decided in a cursory fashion by this court."¹⁰ However, in 1995 that issue did come before the court in City of Edgerton.¹¹

The policyholders in City of Edgerton owned a leaky landfill. When the state and federal environmental agencies requested information from the policyholders and requested, under threat of fines and penalties, that the policyholders take remedial action at the landfill, the policyholders looked to their insurance companies to provide a defense under form CGL policies, claiming the letters from government agencies were "a suit seeking damages." In a four-three opinion, the supreme court in City of Edgerton reversed the court of appeals and held that no defense was required because the policyholder was not sued but only received coercive letters requiring cleanup.

Since the policyholder in City of Edgerton was only seeking a defense under the insurance policies, this ruling as to "suit" should have ended the case. After all, for purposes of a defense (remember, no "suit" is required in a request for indemnification), if you have no "suit" there cannot be a "suit seeking damages" and, thus, whether "damages" are sought is beside the point. But the City of Edgerton court forged ahead and picked up where Shorewood left off with the definition of "damages" in the context of an environmental claim. Relying on Shorewood, the court defined "damages" as "legal compensation for past wrongs or injuries and ... generally pecuniary in nature," which excludes the costs of complying with an injunction. According to the court, this meant that environmental remediation and response costs were not "damages" because such costs were equitable in nature, not designed as compensation for past wrongs.¹²

In effect, this result in City of Edgerton applied the Shorewood distinction between preventive injunctions and compensatory remedies. In so doing, the only environmental costs that qualified as "damages" were natural resource damages available under 42 U.S.C. section 9607(a)(4)(C), and presumably, any state equivalent. Justice Abrahamson led the three dissenters, pointing in particular to the court of appeals decision for analysis on both the suit and damages issue.¹³ The result of City of Edgerton was that insurance coverage was unavailable to a landfill owner because the costs to investigate and remediate the landfill were not "damages" but were injunctive relief. The practical implications were sobering: insurance no longer was available to contribute to what have become staggering costs of cleanup for contamination.

Then came Don Hills and Wisconsin Public Service.

Hills and WPS: The Practical Consequences of Shorewood and City of Edgerton

Waste oil from Mr. Hills' business was sent for recycling to a site in Minnesota known as the Arrowhead site. When the site became contaminated, Arrowhead entered into a consent decree with the United States Environmental Protection Agency (USEPA) to clean up the site. Arrowhead then sued Hills, and hundreds of other parties, under state, federal and common law for recovery of the response costs that Arrowhead had incurred to remediate the site. Mr. Hills tendered the defense and indemnity of the lawsuit to his insurance company, General Casualty Co., which had issued a series of "combination service station" and "garage" insurance policies that covered suits seeking "damages." General Casualty sued Hills, seeking a declaration that it had no duty to defend or indemnify Hills because response costs were not damages. The circuit court granted summary judgment for General Casualty based upon City of Edgerton.

The context of WPS was different, but raised the same question about the meaning of the term "damages" in an insurance policy. The claim arose when Helmreich, an independent contractor working for WPS, cut an underground fuel oil pipe while installing a gas service line to a building owned by the Tomahawk School District. Under order by the Wisconsin DNR, the contamination was investigated and remediated with WPS paying the bills. WPS sued Helmreich's insurance company, Heritage Mutual Insurance Co., for recovery of the costs it had paid to remediate the contamination. Like General Casualty in Hills, Heritage Mutual filed a summary judgment motion claiming that according to City of Edgerton, investigation and remediation costs were not "damages." The circuit court agreed, dismissing the WPS case.

The circuit court decisions in Hills and WPS were hardly remarkable given the supreme court's fresh decision in City of Edgerton. After all, the insurance industry was reading City of Edgerton to mean that costs of investigation and remediation of contamination can never be "damages" as that term is used (but not defined) in a CGL insurance policy. Still, the City of Edgerton decision was not without its critics, including Hills and WPS, which next stopped at the court of appeals to attempt the impossible: distinguish this decision which the insurance industry was convinced (and had convinced many) was indistinguishable. After all, how could an unambiguous word like "damages" have multiple meanings?

What followed was the first significant departure from the broad reading of the City of Edgerton decision. In opinions released the same day, the court of appeals reversed the circuit courts in both Hills andWPS. ¹⁴ As to Hills, the court of appeals noted that unlike the landfill in City of Edgerton, the contamination was not on property owned or controlled by Hills. Although not explicitly stated, this was important so as not to run afoul of the "owned property exclusion" in the policy. The court of appeals then noted that Hills was not being required to investigate or remediate, only to contribute to the costs of that activity performed by the site owner. From this the court of appeals concluded that the remedy sought was not injunctive and, thus, falls outside of City of Edgerton.¹⁵

The reasoning in WPS was tied to different facts, but reached the same coverage result. Unlike Hills, which sent waste oil to the Arrowhead site, WPS was not a tortfeasor that had caused the contamination. It simply was seeking reimbursement for investigation and remediation costs it had paid as a result of the negligence of its independent contractor, Helmreich, who cut the fuel line. This was an easy case not only distinguishable from City of Edgerton but controlled by Nischke v. Farmers & Merchants Bank & Trust, ¹⁶ a case decided after City of Edgerton. Nischke held that a landowner can recover the costs of investigation and remediation as an element of legal damages from the tortfeasor that caused the contamination. In WPS the court of appeals rejected the claim by Heritage that City of Edgerton automatically foreclosed recovery of environmental investigation and remediation costs. Instead, the court of appeals held (again noting that the policyholders in City of Edgerton owned the land) that a landowner is entitled to recover from the tortfeasor's insurer those costs incurred to repair third party property "regardless of whether the government directed the environmental cleanup."¹⁷

The Wisconsin Supreme Court: Back to the Drawing Board

Apart from the results, the most remarkable part of the court of appeals' decisions in Hills and WPS was the clear indication that City of Edgerton should not be read to automatically foreclose recovery of environmental investigation and response costs. But that raises a curious dilemma: If City of Edgerton is to be believed, the word "damages" is unambiguous. How could it mean environmental response costs in some cases, but not others? Enter the Wisconsin Supreme Court. Consolidating both cases, and hearing argument only on Hills, the Wisconsin Supreme Court affirmed both cases in unanimous decisions. In Hills the supreme court held that the suit against Hills seeks "damages" because Arrowhead and others (parties other than the EPA or the DNR) were seeking monetary relief for losses they incurred due to Hills' alleged past contamination of their property.¹⁸ The Hills decision was controlling in WPS where the court held that WPS had coverage because WPS (not EPA or DNR) was seeking recovery for damages that the insured, Helmreich, caused by contaminating property that he does not own or control.

Both decisions focused closely on the particular facts of the appeals, and did not stray into related questions or visit the broader practical implications of the decisions. Yet it cannot go without notice that the thunder of City of Edgerton was quieted. Now it seems clear that costs to clean up contaminated property can be "damages" for insurance purposes:

"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."¹⁹

The court noted that the classification of the action as equitable or legal is not relevant to the determination of whether the remedy sought constitutes "damages." The court also emphasized that its interpretations are in accord with the insured's reasonable expectations.

This seems simple enough, but maybe not. The court did not expressly overrule City of Edgerton or Shorewood.. The court actually restated the basic inquiry from those cases: "[W]e must consider the nature of the relief being sought - whether it is remedial, substitutionary relief that is intended to compensate for past wrongs, or preventive and focusing on future conduct."²⁰ The court then pointed out how Hills and WPS were distinct from City of Edgerton and Shorewood in three ways: 1) neither EPA nor DNR ordered Hills to develop a remediation plan or incur remediation costs under state or federal law; 2) the contamination was not on the Hills property and, thus, not within the owned property exclusion; and 3) unlike Shorewood, Hills was not sued to comply with an injunction. Yet, it is unclear how these three distinctions could matter to the meaning of the term "damages."

The first distinction is factually correct; but does it make a legal difference? Accepting the explicit statement in Hills that the focus is on the interpretation of the insurance policy, not on environmental law, it should not matter whether it is a public agency or private party that requires a policyholder to incur the costs to clean up the contamination and thereby restore the environment. This is particularly important in Wisconsin where the DNR is entrusted by the Legislature to safeguard and protect the environment by directing the parties responsible for the contamination to restore the environment.²¹ It would be peculiar indeed to tie the existence of coverage to the claimant's status. The only time this should make a difference is when there is a specific policy exclusion or term relating to claims by a government agency. This may well be the reason for the court's distinction because, in the WPS case, there was a pollution exclusion in the policy for directives from a government agency.

The second distinction by the court, the owned property exclusion, distinguishes City of Edgerton (recall the policyholder owned the landfill), but it does not seem to impact upon the meaning of the term "damages" in the CGL insuring clause. Rather, the owned property exclusion is a typical policy exclusion that can in certain circumstances prevent a policyholder from recovering under the CGL policy for damage to property owned or occupied by the policyholder. Whether the claim involves property owned or occupied by the policyholder should not affect whether the claim seeks "damages." Accordingly, while this second distinction sets Hills and WPS apart from City of Edgerton, it does not directly inform the "damages" question.

The court's third distinction based upon the injunctive relief holding in Shorewood is accurate, but also is curious. The court said in Hills that the form of action should not matter so long as the nature of the remedy seeks compensation for past losses. Yet, there can be little doubt that money spent to investigate and remediate contamination (whether paid directly by the policyholder or paid to a third party as reimbursement) has as its primary goal to restore the soils and groundwater to their prior, uncontaminated condition. Surely, this is a form of compensation for past losses, whether the money spent is in response to an injunctive order or otherwise. It would elevate form over substance to find there is coverage when a policyholder like Mr. Hills is sued in a contribution case to fund this cleanup, but then deny coverage when the policyholder pays the money directly to put the same remedy in place at the direction of a government agency.

The Remains of Shorewood and City of Edgerton

One could reasonably conclude that after WPS and Hills, the City of Edgerton case means only that a letter from a government agency is not a suit that entitles a policyholder to a defense, and that a general liability policy with an owned property exclusion does not cover investigation and remediation on the policyholder's own property (however that might be defined).²² Any broader reading would seem to conflict with the principles underlying Hills andWPS. As Chief Justice Abrahamson suggested in her concurring opinion in Hills, the "damages" discussion in City of Edgerton was dictum anyway.

Deciding what remains of Shorewood is murky. Since it was not overruled, Shorewood still would control in a suit for declaratory and injunctive relief for racial segregation, where plaintiffs requested attorney fees. But what if the school district had filed a third party suit against another tortfeasor seeking monetary contribution for the remedy? Without an injunction facing the tortfeasor, the Hills decision suggests that the tortfeasor may have coverage because there is a "suit seeking damages"; for example, the defendants would be seeking pecuniary compensation (that is, contribution to the pool of funds) to remedy the tortfeasor's past wrongs. In fact, the tortfeasor might look to Hills and point out that the absence of the injunction demonstrates that Shorewood does not apply to the tortfeasor's case. Suddenly, the form of the action would make a difference. This seems difficult to justify.

Perhaps these problems are what led to Chief Justice Abrahamson's observation in her concurring opinion that she would not leave Shorewood and Edgerton to be overruled "in small measures by debatable judicial distinctions," but would "embrace the inevitable now by expressly overruling Shorewood and thereby recognizing the limited application of the Edgerton decision on damages."²³

Clear Answers Given in Hills and WPS

So long as there are lawyers and insurance companies, questions will continue over the application of insurance coverage to environmental costs. There are, though, some reasonably clear answers when confronting a question of whether a standard CGL policy provides coverage for environmental costs:

• Receipt of a letter from the EPA or DNR requesting a party to propose a remediation plan does not constitute a "suit." ²⁴
  
  
• Claims for natural resource damages are covered as "damages" under City of Edgerton. ²⁵
  
  
• Claims for defense (and maybe indemnity) in private party lawsuits seeking recovery for investigation and cleanup costs under state and federal statute probably are covered. ²⁶
  
  
• Claims by a private party against a tortfeasor's insurance company for recovery of costs incurred by the private party to investigate and remediate contamination caused by that tortfeasor likely are covered. ²⁷
  
  
• Claims by a policyholder for coverage of claims by neighboring landowners for loss of land value due to contamination should be a "suit seeking damages."

The Future

There is little doubt that Hills and WPS provide some clear guidance about the application of CGL policies to at least some types of environmental claims. But judging by the discussion in the opinions, and the concurring opinion of Chief Justice Abrahamson, questions remain unanswered. It appears that there continue to be differences among court members over the proper application of the word "damages" to situations other than those presented by the facts of Hills and WPS. Yet, through all of this, one well-worn principle may guide the way in future cases: deciding the policy interpretation in accord with the expectations of a reasonable person in the position of the insured.

This fundamental insurance principle was emphasized explicitly by the court in Hills and WPS, and appears to have controlled the results of the decisions. One is left to wonder, though, if this principle will be swallowed up as courts in later cases work to apply the fine distinctions made in Hills and WPS between "preventive injunctions," "compensatory monetary relief," "pecuniary losses," "remedial substitutionary relief" and so on. That would be the type of mistake it appears Chief Justice Abrahamson wanted to avoid when she called to overrule Shorewood and limit City of Edgerton. It also is a mistake that takes a step away from the focus on the reasonable policyholder. Policyholders do not carefully weigh these legal distinctions when they have lunch with their insurance representatives and purchase a CGL policy. They think they are buying a comprehensive general liability policy. Nor is it reasonable to believe that insurance executives contemplated and understood these fine differences when they decided not to define the word "damages." After all, if it was so clear that the word "damages" in the insuring clause was not intended to cover costs associated with pollution claims, why did the insurance industry add a separate pollution exclusion to the CGL policy?

This does not mean that the words of a policy should not be given meaning. But it does mean that the proper focus should be on how the reasonable insured looks at those words, not what the insurer chooses them to mean. The Wisconsin Supreme Court has reminded us of that in Hills and WPS.

Endnotes

¹ General Cas. Co. v. Hills, No. 95-2261 (Wis. Apr. 22, 1997).

² Wisconsin Pub. Serv. Corp. v. Heritage Mut. Ins. Co., No. 95-2109 (Wis. Apr. 22, 1997).

³ School Dist. of Shorewood v. Wausau Ins. Co., 170 Wis. 2d 347, 488 N.W.2d 82 (1992).

⁴ City of Edgerton v. General Cas. Co., 184 Wis. 2d 750, 517 N.W.2d 463 (1994), cert. denied, 115 S. Ct. 1360, 2615 (1995).

⁵ E.g., Independent Petrochemical Corp. v. Aetna Cas. & Sur. Co., 944 F.2d 940 (D.C. Cir. 1991), cert. denied, 112 S. Ct. 1777 (1992).

⁶ E.g., Continental Ins. v. Northeastern Pharm. & Chem. Co., 842 F.2d 977 (8th Cir. 1988), cert. denied sub nom, 488 U.S. 821 (1988).

⁷ School Dist. of Shorewood v. Wausau Ins. Co., 168 Wis. 2d 390, 484 N.W.2d 314 (1992), withdrawn on motion for reconsideration, 170 Wis. 2d 347, 488 N.W.2d 82 (1992).

⁸ Id. at 414, 484 N.W.2d at 322.

⁹ School Dist. of Shorewood v. Wausau Ins. Co., 170 Wis. 2d 347, 368, 488 N.W.2d 82 (1992).

¹⁰ Id. at 374.

¹¹ Edgerton v. General Cas. Co., 184 Wis. 2d 750, 517 N.W.2d 463 (1994).

¹² Id. at 782-86.

¹³ Edgerton v. General Cas. Co., 172 Wis. 2d 518, 493 N.W.2d 768 (Ct. App. 1992).

¹⁴ General Cas. Co. v. Hills, 201 Wis. 2d 1, 548 N.W.2d 100 (Ct. App. 1996); Wisconsin Pub. Serv. Corp. v. Heritage Mut. Ins. Co., 200 Wis. 2d 821, 548 N.W.2d 544 (Ct. App. 1996).

¹⁵ Hills, 201 Wis. 2d at 10-12, 548 N.W.2d at 103-04.

¹⁶ Nischke v. Farmers & Merchants Bank & Trust, 187 Wis. 2d 96, 522 N.W.2d 542 (Ct.App. 1994).

¹⁷ Wisconsin Pub. Serv. Corp., 200 Wis. 2d at 833, 548 N.W.2d at 548-49.

¹⁸ Hills, No. 95-2261, slip op. at 17-18.

¹⁹ Id., slip op. at 13.

²⁰ Id., slip op. at 12.

²¹ State v. Mauthe, 123 Wis. 2d 288, 302, 366 N.W.2d 871 (1985); Wisconsin's Env'l Decade v. DNR., 115 Wis. 2d 381, 414, 340 N.W.2d 722 (1983).

²² See e.g. Robert E. Lee & Assoc. Inc. v. Peters, 206 Wis. 2d 508, 526, 557 N.W.2d 457, 464 (Ct. App. 1996) (damages to groundwater under property not excluded under owned property exclusion).

²³ Hills, No. 95-2261 (Abrahamson, S., concurring).

²⁴ Hills, No. 95-2261, slip op. at 15.

²⁵ Edgerton, 184 Wis. 2d at 784-85, 517 N.W.2d at 478.

²⁶ Hills, No. 95-2261.

²⁷ Wisconsin Pub. Serv., No. 95-2109.

Wisconsin Lawyer