In a decision with important implications for “long-tail” environmental contamination coverage claims in the Northwest, a federal court in Washington state has held that information from a confidential “allocation” proceeding in a Superfund site does not need to be produced to an insurer for one of the parties. The decision provides comfort to those hoping that this mediation-like process for resolving liability for historical contamination would not impair their insurance rights. If the decision had gone the other way, the allocation ADR proceeding might have ruptured, forcing parties into expensive and lengthy litigation.

Factual Background. The Lower Duwamish Waterway (LDW), in Seattle, Washington, is one of the larger Superfund “sediment” sites in the country. Some of the potentially responsible parties (PRPs) at the LDW site agreed that rather than litigate about allocation of responsibility for the cleanup, they would enter into an alternative dispute resolution agreement (the Memorandum of Agreement or “MOA”), under which they would hire a private “allocator” who would take evidence and facilitate a private process for arriving at an allocation. This is a not-uncommon way for Superfund sites to be handled – the Portland Harbor Superfund site has a nearly identical process. The parties to the MOA agreed that the process would be covered by Washington’s version of the Uniform Mediation Act, which provides very broad protection for “mediation communications.” RCW 7.07.030(1). King County, which includes Seattle, is a party to the MOA.

Wausau Insurance—and others—issued general liability policies to King County in the past. Wausau is funding part of King County’s defense at the LDW, including some costs of participating in the allocation process under the MOA, but under a reservation of rights. King County was dissatisfied with Wausau’s reservation of rights and level of participation in its defense and sued Wausau. Wausau sought discovery of documents exchanged in the LDW allocation proceeding to help it prove some of its coverage defenses (including “known loss”), and moved to compel when King County refused to provide documents submitted by other participants in the allocation (King County provided its own documents).

The MOA’s Carve-Out. One problem commonly encountered in a Superfund allocation process is that some participants want to be able to share information with insurers that are providing them with a defense. To permit that, the MOA contained a carve-out clause allowing a participant to provide information to its insurers, so long as the participant gave “direction” to the insurers to keep the information confidential. (This “direction to keep confidential” language became very important.)

The Insurer’s Argument. Wausau seized on that carve-out clause in the MOA, arguing that the parties had agreed on an exception to mediation-privilege protection, that therefore King County was permitted to provide the discovery that it demanded, and that under the federal rules on discovery King County was obligated to comply with its demands.

Wausau also argued that a state law exception to the mediation privilege, which revokes protection for documents not specifically prepared for mediation, applied. Wausau argued that under this exception raw data and historical documents held by the other parties to the allocation could not be withheld.

The Court’s Ruling. The court rejected Wausau’s argument that the MOA’s carve-out mandated disclosure of the information, holding that the carve-out permitted but did not require King County to provide allocation information. The court noted that the other parties to the MOA objected to King County providing the information and that what was at issue was not King County’s confidential information but the information of the other parties. This means that King County could not itself decide whether to provide the information.

With regard to the statutory exception, the court took Wausau to task for trying to use the allocation process to force its insured to provide documents that Wausau could have gotten through a subpoena directed to the allocation participants. (King County alleged in its motion that Wausau was not actually interested in receiving the raw data or historical documents, but was hoping to get at the parties’ confidential analysis of that data, so that Wausau would not have to do the analysis itself).

What the Court Did Not Decide. What the court did not decide is perhaps the most interesting nuance of the dispute: the tension between the court’s ruling and the “duty to cooperate.” As we discussed previously in this post, many insurers will insist that the insured has an obligation to cooperate with information requests from the insurer during defense of a claim – including requests for information relevant to coverage issues. As noted above, that is one of the reasons that the MOA contains a broad “carve out” allowing information to be shared under some circumstances.

In this case, Wausau did not push on the duty to cooperate issue, perhaps because it thought that it had a better argument under the rules of civil procedure regarding discovery. Nor did Wausau push too hard on another argument that it had: that Wausau had agreed to a protective order under which it agreed to ask that confidential information is filed with the court under seal. But King County and the other interested parties addressed both of those issues, in the context of the MOA provision. They argued that an insurer would be entitled to the allocation information only if the policyholder had control over what the insurer would do with the information, including ensuring that the information was not going to be used in litigation at all – otherwise, the “direction to keep confidential” provision in the MOA would not be satisfied, because the policyholder could not issue a “direction” to the insurer. In other words, in the allocation participants’ view, the duty to cooperate and the MOA carve-out only apply if the party’s insurer has obligated itself not to litigate over questions of coverage.

Take-Aways. Policyholders should expect that although Wausau did not fight hard on the “duty to cooperate” issue, other insurers will. As discussed in a recent paper that I co-authored for the ABA, insurers that view themselves as full participants in the insured’s defense (which perhaps Wausau did not) usually take a broad view of the cooperation obligation. Those insurers, however, may not agree that they cannot litigate coverage defenses using information from a confidential allocation proceeding, even if under seal. Therefore, this decision—although welcome news—may not be the end of the story. Policyholders that are engaged in allocation proceedings (whether in the LDW, Portland Harbor, or elsewhere) should continue to be vigilant about the wording of mediation agreements and coverage correspondence, to protect both their coverage interests and the continued viability of alternative dispute resolution in complex Superfund disputes.

 

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