On September 4, 2020, the United States Court of Appeals for the Fifth Circuit upheld a district court’s decision that AIG Specialty Insurance Company (“ASIC”) was not liable for more than $12 million dollars in legal expenses incurred by Waste Management, Inc. (“Waste”) for defending criminal charges that were brought against the company for environmental contamination, agreeing with the lower court that there was no duty to defend the criminal case under the insurer’s pollution liability policy.  See Waste Management Inc. et al. v. AIG Specialty Insurance Co. f/k/a Chartis Specialty Insurance Co., Case No. 19-20674, 2020 WL 5268504  (5^th Cir. September 4, 2020).

Waste Management, Inc. operated a landfill in Honolulu, Hawaii. Flooding in 2010 and 2011 caused medical waste — including syringes, blood vials and catheters — from the landfill to be discharged through an open manhole into the Pacific Ocean, eventually washing up on nearby beaches. The Environmental Protection Agency ordered Waste to clean it up, which was reportedly completed to the agency’s satisfaction by August of 2011.  However, following investigation by the Department of Justice, Waste and two of its employees were criminally indicted for knowing discharge of pollutants into U.S. waters.  The defendants eventually entered into a plea agreement and pled guilty to a lesser charge.

Waste sought coverage from ASIC under its pollution liability policy for the costs of defending the criminal proceedings.  That policy, which provided Waste with $50 million dollars of coverage per incident, obligated ASIC to defend the insured against “claims” defined as “a written demand received by the Insured alleging liability or responsibility and seeking a remedy on the part of the Insured for [clean-up costs].” The Policy stated that it did “not apply to Claims or Loss … [d]ue to any criminal fines, criminal penalties or criminal assessments.” ASIC denied coverage for all costs associated with the criminal case.

Waste brought suit against ASIC and its claims handler AIG Claims in Texas state court, alleging that ASIC breached its duty to defend and indemnify Waste under the insurance contract in addition to claims for bad faith and violations of the Insurance Code.  ASIC removed to federal court, alleging that AIG Claims was improperly joined solely to defeat federal diversity jurisdiction.  Waste moved to remand, but the district court denied the motion, finding no plausible claim for recovery against AIG Claims.  The district court granted summary judgment in favor of ASIC, finding no duty to defend against the criminal charges under the policy.

Waste appealed, arguing that (1) remand to state court was warranted because there was adequate support for its allegation that the insurance adjuster violated the Insurance Code by mishandling the claim; (2) the EPA’s original 2011 clean-up order triggered an ongoing duty to defend that extended through the later criminal proceedings; or in the alternative that (3) the indictment constitutes a “claim” under the policy because it was possible that the federal government would seek the payment of clean-up costs.

The Fifth Circuit found no error in the lower court’s determination that there was no reasonable chance that Waste would recover against AIG Claims as Waste failed to allege facts that, taken as true, demonstrate a violation of the Insurance Code provisions, noting that the only relevant AIG Claims-specific facts alleged in Waste’s complaint were that the insurance adjuster sent a letter denying Waste’s claim.  As the court noted, Waste did not allege that AIG Claims failed to investigate, delayed any investigation, misevaluated, misprocessed, made any misrepresentation of the policy, or otherwise failed to “effectuate” a fair settlement, as required for Insurance Code liability.

The Court rejected Waste’s argument that the EPA’s 2011 clean-up order triggered ASIC’s duty to defend against the later criminal allegations, noting that the claim for clean-up costs was independent of the criminal proceedings. Waste pointed to federal enforcement guidance documents that it argued established that all of the proceeding arising out of the pollution incidents were part of a single coordinated enforcement process. The Fifth Circuit, without deciding whether it was appropriate to look at the federal guidance documents, which were extrinsic to the policy and complaint, disagreed with Waste’s expansive view. The court noted that when there is a claim for clean-up costs, ASIC has a duty to defend against “such claim.” The Court reasoned:

This language provides a common-sense limit on ASIC’s duty to defend: When there is a written demand for clean-up costs covered by the policy, ASIC must defend against that written demand. Were we to agree with Waste that the AOC, read in combination with the guidance documents, triggered a duty for ASIC to defend in all criminal or civil proceedings arising from the same pollution incidents, we would effectively be reading this bargained-for restriction out of the contract. We are not at liberty to do so. See Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154, 162 (Tex. 2003) (“[W]e may neither rewrite the parties’ contract nor add to its language.”); Richards v. State Farm Lloyds, 597 S.W.3d 492, 499 (Tex. 2020) (“The goal in interpreting the contractual duty to defend—as when interpreting any contract language—is to ascertain the true intentions of the parties as expressed in the writing itself.” (internal quotation marks and citation omitted)).

The Court similarly rejected Waste’s alternative argument that the indictment constitutes a “claim” under the terms of the policy, stating:

The indictment, which was explicitly limited to criminal rather than civil penalties, does not expressly seek any remedy from Waste. Therefore, on its face, the indictment does not appear to fall within the policy’s definition of a “Claim.”

The Fifth Circuit concluded that the district court did not err in finding that there was no claim that triggered ASIC’s duty to defend against the criminal charges and that accordingly, the lower court did not err in granting summary judgment in ASIC’s favor on that issue, or on the remaining issues that were dependent on ASIC’s duty to defend.

Takeaways: This opinion is a good example of the reluctance of Texas courts (and courts applying Texas law) to rewrite contracts, including insurance policies. It is also a good checklist of what you need to plead if you are a policyholder attorney seeking to allege a viable Insurance Code cause of action against an adjuster.