Do Subrogation Clauses Need to Be Strengthened?

While there are always questions regarding the insured’s willingness to cooperate in a subrogation lawsuit, there has, until now, been little doubt that the subrogation clauses in insurance policies are sufficient to protect an insurer’s interests. This status quo has been called into question by the case of Chubb Custom Insurance Co. v. Space Systems/Loral, LLC, et al., a 9th Circuit case, which the US Supreme Court denied certiorari on earlier this week.

The facts of the case are as follows.

Chubb insured Taube-Koret, a retirement home that was located on polluted land formerly owned by Sun Microsystems Inc., Ford Aerospace & Communications Corp. and others. Taube-Koret, although it did not cause the problem, was ordered to clean up the pollution on the property pursuant to the provisions of the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). Chubb paid for the cleanup and then attempted to recover the costs from the original polluters under CERCLA Section 107.

A California federal judge dismissed the claims and the 9th Circuit affirmed. The basis for the dismissal was the courts’ conclusion that CERCLA Section 107 does not allow direct subrogation claims and that therefore the only way an insurer can recover its costs via subrogation is under CERCLA Section 112 that requires the claimant (i.e. the insured) to demand compensation from Superfund or a liable party. Because Taube-Koret never personally made such a claim, the dismissal was warranted. The Supreme Court’s instant refusal to hear the case means that the 9th Circuit’s decision is binding.

Why is all of this important? Because, under this case law, to have a viable pollution subrogation claim, an insurer must first instruct its insured to prosecute a claim again the culpable parties, which, of course, means that the insurer cannot have first paid the claim – otherwise there would be no damages. Even if permissible under the wording of a typical insurance policy (which is doubtful), it seems highly unlikely to expect an insured to first attempt (at its own cost) to sue a polluter before its insurance claim is paid. So, thought will have to be given to how policy wording can be changed to remedy this – perhaps (as in crisis management policies) insurer paid legal counsel can be assigned at first reporting to assist with the prosecution?

For more information about this post, please contact Bob Cosgrove at rcosgrove@wcmlaw.com.