Wisconsin Central, Ltd. entered into an agreement that included the purchase of rail lines from Soo Line Railroad Company. Part of that agreement allocated responsibility for future environmental liabilities. Years later, contamination was discovered near one of those lines in Ashland, Wisconsin on the shore of Lake Superior. In Wisconsin Central Ltd. v. Soo Line Railroad Company, No. 19-3129, United States Court of Appeals For the Seventh Circuit (March 31, 2021) the Seventh Circuit was asked to reverse a decision of the USDC that Wisconsin Central owed indemnity to Soo Line who had transferred the risk of loss by a decades old agreement.
The railroads jointly defended and settled responsibility for the investigation and remediation of that site. Then they each sought indemnification from the other. The district court awarded summary judgment to Soo Line for damages, attorneys’ fees, and costs.
On appeal, the railroads dispute when a claim was first asserted, and how much of the cost of defending and settling the matter was related to the rail lines and their operation. Indemnification under the agreement turns on both issues.
In a 1987 Asset Purchase Agreement (“Agreement”) Wisconsin Central purchased various assets of Soo Line’s Lake States Transportation division, including physical rail lines in Minnesota, Wisconsin, and Michigan (“LST”). The Agreement provided for a detailed allocation of liability and indemnification of each party by the other. Soo Line agreed to retain liability and indemnify Wisconsin Central for “all claims for environmental matters relating to ownership of the Assets or the operation of LST that are asserted” within ten years of the closing of the deal (the “claim period”). After the end of the claim period, Wisconsin Central would in turn assume all liability and indemnify Soo Line for any such claims, regardless of whether Soo Line was at fault. The deal finally closed on October 11, 1987, and the claim period ran through October 11, 1997.
A few years into the Agreement, local and state authorities discovered contamination in Ashland in what used to be an industrial area but is now a public recreational area called Kreher Park. Running through the park is a railroad right-of-way purchased by Wisconsin Central under the Agreement. The Wisconsin Department of Natural Resources (“WDNR”) identified an old manufactured gas plant as the likely source of the contamination, and the agency issued a “potentially responsible party” (“PRP”) letter to its owner, Northern States Power Company (“Northern States”), requiring it to investigate and potentially clean up the contamination.
Northern States undertook an extensive campaign to shift responsibility to the railroads. Northern States urged the WDNR to name the railroads as PRPs “as soon as possible.”
At no point during the claim period did Northern States or the WDNR threaten to take legal action against either railroad company.
Years later, in 2002, the Environmental Protection Agency became involved and designated an area including Kreher Park as a Superfund site under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), 42 U.S.C. § 9601, et seq. The EPA also obtained from Wisconsin Central and Soo Line a consent decree and settled the claims by the EPA and Northern States for a combined $10.5 million plus interest, with each railroad paying half of that amount and reserving the right to seek indemnification from the other.
Wisconsin Central then sued Soo Line for breach of contract, arguing that the environmental claims were asserted during the claim period and that Wisconsin Central was entitled to indemnification for the entire amount that it paid in the settlement, plus interest, fees, and costs. Soo Line brought a counterclaim for the same, arguing that no claim was asserted until after the claim period had expired. The district court granted summary judgment to Soo Line, The court awarded Soo Line damages of $10,799,427, plus prejudgment interest, as well as $1,776,764 for attorneys’ fees for the present case.
Wisconsin Central appealed.
The relevant part of the Agreement’s indemnification clause states: “… [Wisconsin Central] shall assume the following liabilities and obligations of Soo [Line]: …all claims for environmental matters relating to the ownership of the Assets or the operation of LST that are asserted after the tenth anniversary of the Closing Date …”
In the cited cases by Wisconsin Central a government regulator took some formal action against the party or the property of the party against whom a “claim” (or “suit”) was then deemed to have been asserted. “Potentially Responsible Party” and “Request for Information” letters bear deceptive names. Such communications are not friendly requests for materials, or mere notices that a party might become liable in the future. Rather, they are the formal mechanisms by which a party is brought under the authority of the regulator.
In this case the facts show that the WDNR took no action against the railroads during the claim period. No authority cited to the appellate court recognizes a transitive property that converts Northern States’ efforts — to convince the regulator to send a PRP letter to the railroads and to persuade the railroads to voluntarily join the cleanup effort — into the equivalent of a regulator actually sending a PRP letter or taking other official action that would constitute a “claim.”
Northern States’s actions did not meet the definition of “claim.” The problem is not that Northern States failed to include in its communications a monetary amount or the precise legal basis for its right to relief — Wisconsin Central forcefully argues that those are not requirements for the existence of a claim. Rather, Northern States did not assert any right to relief, nor make any demands for relief, against either railroad during the claim period.
Making comments to the press, asking a party to voluntarily contribute, unsuccessfully asking (even begging) a third party to assert a claim, and meeting with parties to try to persuade them to voluntarily join a remediation effort by convincing them that a regulator will take formal action—all of these are distinct from “asserting a claim.”
Under Minnesota law, every contract has an implied covenant of good faith and fair dealing. For Wisconsin Central to seek a PRP letter — that is, to seek to have a claim asserted against it just to secure indemnification from Soo Line — risks breaching that covenant. Likewise, it would have been a breach of the covenant for Soo Line to try to delay the issuance of such a letter until after the claim period just to secure indemnification from Wisconsin Central. Neither party alleges that anything like that occurred.
There was no “claim” concerning the Kreher Park environmental contamination site asserted against the railroads during the Agreement’s claim period. During that period, Northern States neither threatened litigation nor invoked its right to sue the railroads, and the WDNR did not take any action that imposed any legal duties or impending legal peril on either railroad. Under the Agreement, the responsibility to defend and indemnify against the environmental claims thus belonged to Wisconsin Central, not to Soo Line.
The liability and related damages in the Superfund matters were not limited to ownership of the land. Rather, the record shows that the settlement amount here was based on the polluting activities allegedly carried out by the railroads. It was by owning the “Assets” that the parties could become jointly and severally liable for the Superfund site in the first place. Therefore, if the railroads had not been accused of contributing to the pollution but were instead held strictly liable as landholders — other facts being the same — the appellate court would still require Wisconsin Central to indemnify Soo Line under the “ownership of the Assets” part of the indemnification clause.
Liability was premised on the historical actions of the parties and their predecessors, and the parties memorialized the allocation of that liability between them in a contract. All liability for these claims is related to the operation of LST, so under the Agreement, Wisconsin Central is responsible for 100% of the environmental damages, plus interest, attorneys’ fees, and costs. The district court’s grant of summary judgment to Soo Line was affirmed.
For there to be a “claim” under an indemnity contract or an insurance contract, there must be a demand for money or other action such as a PRP letter. A claim was made but it was made after the expiration of the indemnity agreement just as it would have if a claim was made on an insurance contract after it expired.
© 2021 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost
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