Environmental claims: excess/umbrella carriers may have to clean up after government-mandated orders.

It is well-known in the world of environmental exposure that policyholders in all jurisdictions face environmental liabilities, subjecting them to costly administrative agency orders--in lieu of formal lawsuits--requiring remediation and abatement of contamination.

Absent the filing of formal litigation, there has been a general understanding among excess/umbrella carriers that they will not be responsible for costs associated with these government-mandated remediation and abatement orders. However, two California Supreme Court rulings call this into question and highlight how critical wording is in determining whether excess/umbrella carriers will need to cover government-mandated orders.

Powerine Oil Co. Inc. vs. Superior Court (Powerine II) and County of San Diego vs. Ace Property & Casualty Iris. Co. (County of San Diego) addressed the responsibility of excess/umbrella carriers regarding costs associated with California Regional Water Quality Control Board remedial cleanup and abatement orders pertaining to soil and/or groundwater contamination.

The Supreme Court of California issued an opinion on August 29 in Powerine II, supporting policyholder efforts to recover costs of complying with pollution cleanup and abatement orders issued by administrative agencies--costs that the state Supreme Court previously held were not covered under standard comprehensive general-liability insurance policies absent the filing of a formal suit.

The California Supreme Court held that under a literal reading of the excess/umbrella liability policies at issue, the wording of the insuring agreement was broad enough to include coverage for environmental cleanup and response costs ordered by an administrative agency.

In a separate and companion opinion, however, the California Supreme Court held in County of San Diego that an insuring provision of a"manuscript form" excess policy did not extend coverage to costs and expenses associated with responding to administrative orders outside the context of a government-initiated lawsuit. Instead, it limited the carrier's indemnity obligation to "damages," meaning "money ordered by a court."

Two words made the difference in these two cases: expenses and damages.

In Powerine II, the insuring agreement in the excess/umbrella policies provided coverage for both "damages" and "expenses." In addition, the language in the agreement referred to "ultimate net loss" in defining "expenses," expressly including money the insured was obligated to pay for the "investigation of claims"

The court held that this plain language provided coverage for expenses incurred by the insured in responding to government agency orders administratively imposed, even though the government did not file any lawsuit against the insured seeking cleanup and abatement of environmental pollution.

In County of San Diego, the California Supreme Court again focused on specific wording in the insuring agreement, but held that excess policy language restricted coverage to court-ordered money judgments and did not include cleanup expenses incurred in responding to government orders. The insuring language of the excess policy in the County of San Diego case provided coverage for"damages because of injury to or destruction of tangible property." The policy did not provide coverage for "expenses," as did the policies in Powerine II.

The County of San Diego court also reasoned that in the policy at issue there, unlike the policies in Powerine II, the definition of the term "ultimate net loss" only served to identify the insured's total loss that would count toward exhaustion of the self-insured retention. The policy did not incorporate "ultimate net loss" or similar language into the coverage grant itself.

The import of these decisions is that small changes in wording--coverage for"expenses" as opposed to coverage for "damages"--can significantly impact a liability carrier's obligation to provide insurance coverage for environmental cleanup costs incurred in responding to government agency-issued orders. Powerine II opens the door for policyholders to potentially recover compliance costs of administrative orders under umbrella liability policies--without forcing the government to sue.

Of course, coverage will ultimately depend upon the precise language of the policies at issue, compliance with policy terms and conditions, and the potential application of exclusions. At a minimum, Powerine II provides a possible basis for recovery of administrative costs where none might have existed before.

The courts of jurisdictions other than California could soon follow suit.

Jennifer M. Bozeat, a Best's Review contributor, is a member of the national insurance litigation department at the law firm of Cozen O'Connog, San Francisco. She can be reached at [e-mail].