Last week Magistrate Judge Stewart issued an order on the thorny issue of how to characterize some of the costs associated with a complex environmental cleanup.  Are they indemnity costs that deplete the insured’s insurance policies, or are they defense costs, which do not?  The decision resolves yet more issues in the Siltronic litigation between Siltronic, a major player at the Portland Harbor Superfund Site, its primary layer carriers (principally Wausau), and excess carrier AIG.  Siltronic has had to perform some cleanup-type work and extensive studies and monitoring at its facilities, well in advance of any cleanup of the contaminated sediment in the Willamette River that is the focus of the site.

Under the Oregon Environmental Cleanup Assistance Act’s 2003 amendments certain investigatory costs are presumptively deemed “defense” costs, whereas some types of remedial costs are presumptively deemed “indemnity” costs.  But environmental sites are notoriously complex and what seems like remediation to some can look like further investigation to others.  In Siltronic the company and its primary-layer carriers reached an agreement on an allocation of the costs in such a way that the primary policy was exhausted, meaning that the excess carrier (AIG) would be on the hook.  AIG challenged the allocation, arguing that the primary carrier had designated many costs as indemnity that should have been defense.

Judge Stewart’s decision is quite nuanced and deserves a close read.  Overall, her approach was to go behind the labels applied by the agencies, vendors, or attorneys to look at what was actually going on when a particular cost was incurred and its purpose, to see whether the statutory presumptions had been overcome (or whether they applied at all).  This decision is something of a harbinger for what will likely be significant disputes between policyholders, their primary carriers, and excess carriers when the “big” remediation at the Portland Harbor begins in earnest.