Indemnification Versus Contribution

The issue of who can sue potentially responsible parties under CERCLA and whether that suit can be under the indemnification provision of Section 9607 or the contribution provision under Section 9613 was addressed recently by the United States District Court for the Eastern District of Michigan in the case of American Special Risk Insurance Co. v. City of Centerline, 69 F. Supp. 2d 944(E.D. Mich. 1999). The South Macomb Disposal Authority ("SMDA") is a municipal corporation formed by five cities to collect and dispose of municipal waste. The SMDA operated two landfills, which caused contamination of the groundwater in the area. Adjacent residents and the Michigan Department of Natural Resources sued SMDA, which then undertook remedial actions at the sites. SMDA sued American Special Risk Insurance Company ("American Risk") under its environmental impairment liability policy. American Risk then sued the five cities which formed and made up the membership of SMDA for indemnification and contribution under CERCLA.

The cities moved to dismiss the complaint and the District Court agreed that American Risk could not sue under indemnification because SMDA was a PRP and American Risk was suing "on behalf of and in the name of" SMDA. Indemnification is not available unless the remediation is undertaken as a voluntary cleanup or the plaintiff is a truly innocent party. Since the cleanup effort was clearly not voluntary since it was not done until after SMDA had been sued, the issue was whether SMDA was an innocent party. The court said that to establish itself as innocent SMDA must demonstrate that: (1)another party was the "sole cause" of the release of hazardous substances and the damages caused thereby; (2)the other responsible party did not cause the release in connection with a contractual, employment, or agency relationship with SMDA; and (3)SMDA exercised due care and guarded against the foreseeable acts or omissions of the responsible party. Since SMDA was the operator of the landfills, it failed the first test and the indemnification provision of the complaint was dismissed.

The cities also asked to have the contribution count of the complaint dismissed because they claimed that they were insureds under the environmental impairment liability policy issued by SMDA, since the cities were the members of SMDA and appointed the SMDA's board of directors. The court agreed and dismissed the complaint to the extent that it demanded contribution from the cities because they exercised control over the SMDA's board of directors. The court refused, however, to dismiss that part of the complaint that alleged liability against the cities as customers of SMDA and therefore arrangers, generators and transporters of waste that ended up in the landfills.