Washington’s Strong Policy in Favor of Environmental Cleanup Leads Court to Void Insurance Settlements

Washington law generally bars insurers and policyholders from agreeing to cancel liability insurance retroactively after a claim. Liability insurance covers the policyholder for claims another person brings against them. The insurance company defends the policyholder against the third party in court and pays any judgment up to the policy limits.

The Washington Court of Appeals recently applied this rule in the context of Washington’s interest in environmental cleanup to void agreements settling insurance coverage for lumber mill pollution.

In Pope Resources v. Certain Underwriters at Lloyd’s, London, the Washington Court of Appeals considered ten different insurance policies covering a sawmill in Port Gamble, Washington. The mill operated since 1853 and was covered by numerous liability insurance policies. The mill was shut down due to severe environmental contamination in 1995. It is listed as a hazardous waste site by the Washington State Department of Ecology with an estimated $22 million price tag to clean up.

In 1997, the mill’s owner, Pope Resources, signed a contract with its corporate affiliate, Pope & Talbot, stating that Pope & Talbot would take responsibility for cleaning up the contamination. Pope & Talbot then filed suit against ten different insurance companies who had provided liability insurance for the mill, asking the court to find that the insurers had to cover the cleanup. The case resulted in ten different settlement agreements between Pope & Talbot and the ten insurance companies.

In 2015, Pope Resources filed its own lawsuit asking for cleanup costs from Pope & Talbot and the ten insurers. The lower court decided that the settlement agreements between Pope & Talbot and the insurance companies was void because the settlements retroactively canceled the liability insurance coverage that was supposed to cover claims against Pope & Talbot for the environmental damage.

The Court of Appeals found this decision was correct and affirmed the ruling. It first emphasized Washington’s significant interest in making sure that the contaminated sawmill was cleaned up. The state’s interested in fixing environmental contamination is “paramount” according to the court.

The court first found that this interest was critical to the insurance policies at issue because liability insurance often provides money to pay for the agonizingly expensive cleanup of industrial contamination.

Next, the court determined that the settlement agreements between Pope & Talbot and the ten insurance companies improperly let the insurers off the hook for the environmental contamination they had agreed to cover. This was true even though some settlement agreements only applied to the Port Gamble mill and did not nullify Pope & Talbot’s entire insurance policy. The court emphasized that the insurers were free to cancel or buy out Pope & Talbot’s coverage for future environmental damage. But they could not do so retroactively for contamination that had already happened.

The case is interesting because of its application of the strong public policy favoring environmental contamination. The ruling suggests that absent the prospect of leaving no funds to remediate the contaminated sawmill (i.e., leaving the residents of Port Gamble holding the bag) the result might have been different.

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