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BHGR Newsletter: Tenth Circuit Rules On Collateral Source Rule And Allocation Of Settlement Payments

July 2009

The president of a mining company paid $20 million to the government to reimburse the government for its environmental cleanup costs at a mine. The president also paid $28 million in legal fees to defend the government’s lawsuit against the mining company. In a separate lawsuit, the president sued several insurance companies to recover both the $20 million he paid in cleanup costs and the $28 million he paid in legal fees. In a third lawsuit, the president filed a CERCLA Section 113 contribution claim against some entities allegedly responsible (known as Potentially Responsible Parties, or “PRPs”), for the $20 million in cleanup costs the president paid to the government. Litigation fees for private entities are not recoverable under CERCLA Section 113 claims.

In settling the insurance lawsuit, the president received more than $20 million in settlement from the insurers, but less than the combined $48 million in cleanup costs and legal fees.

The PRPs in the third lawsuit then argued that the president should not be allowed to collect any money from them because the president had already been reimbursed by the insurers for the $20 million the president sought from the PRPs. The PRPs argued that because existing CERCLA case law barred the president’s recovery of the $28 million in litigation fees from them, the only recoverable costs were the $20 million in cleanup costs. Because the president recovered more than $20 million, there were no more recoverable costs left for him to recover.

The president responded with two arguments. First, the president said that none of the settlement amounts paid to him by the insurers should reduce the $20 million he sought from the PRPs because of the collateral source rule. The collateral source rule created by previous case law allows an injured person to recover twice; once from a third party such as an insurer (i.e. the collateral source), and once from the party who caused the injury. When windfalls are available, the public policy of the collateral source rule prefers double recovery by the innocent plaintiff, rather than reduced liability for the culpable party. Courts have applied this rule when the injured plaintiff has been compensated by Social Security disability payments, unemployment compensation, or by the plaintiff's insurance. (Insurance policies typically provide that amounts recovered by the insured should go back to the insurance company if there is a windfall to prevent double recovery). For the first time, the Tenth Circuit was asked to determine how this rule applies in a CERCLA contribution action.

In short, the Tenth Circuit did not agree with the president’s argument. The Court said that a CERCLA contribution action is not a personal injury action by an innocent plaintiff. Instead, it is a claim between two or more culpable parties, and the policy underlying the collateral source rule -- to provide the innocent party with the benefit of any windfall -- is simply not advanced in such cases. Moreover, CERCLA mandates that courts apportion response costs equitably among liable parties. The Court noted that every federal court that has addressed the issue has reached the same conclusion, either with or without reference to the collateral source rule.

The president’s second argument was that the amounts he received from the insurers should be allocated to both his $28 million in legal fees and to the $20 million in cleanup costs. The Tenth Circuit said, however, that all of the settlement amounts would go to reducing the $20 million in cleanup costs, and because the president received more than $20 million in settlement from the insurers, the president cannot recover anything from the PRPs. As noted above, this is because private parties’ attorneys’ fees are not recoverable under CERCLA. The Court explained that because the president’s settlement agreement with the insurers did not allocate the recovered costs in any specific manner between legal fees and cleanup costs, the Court would not do so at a later date. Instead, the Court credited all the monies received in the settlement agreement to cleanup costs. See Friedland v. TIC-The Indus. Co., ___ F.3d ___, 2009 WL 1492545, No. 08-1042, (10th Cir. May 29, 2009).

Parties negotiating settlements and entering into settlement agreements should take care to document the allocated settlement amounts in ways that make it clear which types of damages are being paid and how much is attributed to the different types of damages, leaving room for future recoveries against others, if possible. Our Environmental & Water Law or Natural Resource Development Practice Groups are here to help answer your questions.

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