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California Aligns With Courts Finding No Coverage for Pollution Costs Imposed on Policyholder Administrative Agency. (Recent Court Decisions).

Certain Underwriters at Lloyd's, London v. Superior Court, 24 Cal. 4th 945,16 P.3d 94,103 Cal. Rptr.2d 672 (Cal. 2001)

Powerine Oil Company, an oil refiner, was the target of several administrative proceedings concerning environmental claims. Specifically, the Environmental Protection Agency (EPA) and the California Regional Water Quality Control Boards for the regions of Los Angeles and San Diego instituted proceedings against Powerine to clean up contaminated soil and groundwater at various sites. Powerine sought coverage from its liability insurers, which denied coverage. Powerine suffered a similar fate at the hands of the California Supreme Court, which held that administrative agency claims for pollution cleanup were not the equivalent of judicial proceedings and hence were not covered under the commercial general liability (CGL) policies issued by the insurers.

In Powerine, the California Supreme Court finally spoke to an issue that has been litigated throughout the country for more than a decade, with mixed results. The court also rendered an opinion that is both arguably foreshadowed by its most recent precedent on the subject and arguably contradicted by other fairly recent precedents. The issue, in a nutshell, is whether the CGL standard policy, which states that it will pay to the policyholder such "sums as the insured is legally obligated to pay as damages," is limited to adverse court judgments, or whether it also applies to liability imposed by administrative agency proceedings. In other words, does the term "damages" encompass this sort of liability, and must the imposition of such liability come from a judicial proceeding?

In 1990, the California Supreme Court in AIU Ins. Co. v. Superior Court, 51 Cal. 3d 807, 840, 274 Cal. Rptr. 820,799 P.2d 1253 (1990), concluded that the term "damages" was not restricted to money damages of the type that fit the lawyer's technical definition (e.g., the traditional form of monetary relief entitling the litigant to a jury trial) but also included equitable relief such as reimbursing a state agency or other entity for the costs of pollution cleanup. In so holding, California aligned itself with the majority of jurisdictions on this part of the "who pays for pollution" question. See, e.g., Morrisville Water & Light Dept. v. United States Fid. & Guar., 775 F. Supp. 718, 726-27 (D. Vt. 1991); Alabama Plating Co. v. United States Fid. & Guar., 690 So.2d 331, 336-37 (Ala. 1996); Weyerhauser Co. v. Aetna Prop. & Cas. Co., 123 Wash.2d 891, 896-913, 874 P.2d 142(1994); Coakley v. Maine Bonding & Cas. Co., 136 N.H. 402, 618 A.2d 777(1992); Minnesota Mining & Mg. Co. v. Travelers Indem. Co., 457 N.W.2d 1 75, 182-83 (Minn. 1990) ("damages" as used in CGL policy not limited to technical meaning of legal damages but encompasses amounts policyholder is required to pay because of legal obligation); Spangler Construction v. Industrial Crankshaft & Eng. Co., 326 N.C. 133, 388 S.E.2d 557 (1990). Contra, Continental Ins. Cos. v. Northeastern Pharm. & Chem. Co. (NEPACCO), 842 F.2d 977 (8th Cir. 1988) (applying Missouri law) ("damages" does not include cost of cleanup); City of Edgerton v. General Cas. Co. of Wis., 517 N.W.2d 463 (Wis. 1994). But see Independent Petrochemical Co. v. Aetna Cas. & Sur. Co., 944 F.2d 940 (D.C. 1991) (applying Missouri law) (disagreeing with NEPACCO analysis); Farmland Indus., Inc. v. Republic Ins. Co., 941 S.W.2d 505 (Mo. 1997) (Missouri Supreme Court, rendering final word on meaning of Missouri law, holds that "damages" encompasses cleanup costs).

But although AIu involved funding cleanup costs rather than a judgment for money damages, it nonetheless involved a judicial proceeding. Hence, the AIu court's decision in favor of the policyholder in that case did not definitively resolve the question of whether insurers were required to provide either a defense or indemnity coverage for nonjudicial actions, e.g., the administrative enforcement proceedings that are so prominent in the application of environmental protection statutes such as CERCLA (the Comprehensive Environmental Response, Compensation and Liability Act, best known as Superfund).

In Foster-Gardner, Inc. v. National Union Fire Ins. Co., 18 Cal. 4th 857, 77 Cal. Rptr. 2d 107, 959 P.2d 265 (1998), the California Supreme Court gave back to insurers some of what it gave to policyholders in AIu by holding that an administrative action to obtain pollution cleanup was not a judicial proceeding that required a CGL carrier to defend the policyholder. The Foster-Gardner court, in what it admitted was a rather literal view of the CGL language, which spoke of an obligation to defend "suits" against the policyholder, held that anything other than a traditional lawsuit was not within the scope of the insurer's duty to defend. Under Foster-Gardner and Powerine, however, a liability insurer is still apparently obligated to attempt to settle "claims" against the policyholder. See 16 P.3d at 117-18 (Kennard, J., dissenting, reasoning that insurer's obligation to settle claims is not limited by restrictions on duty to defend formal litigation or lack of coverage for administrative agency orders of paymen t). However, as long as the claim is proceeding outside the judicial forum, there is without doubt no insurer obligation in California to appear in the proceedings and to defend against them in an adversarial manner.

Because Foster-Gardner involved only the duty to defend, it did not resolve the question of whether the amounts of money successfully sought against the policyholder in an administrative proceeding were covered by the indemnity provisions of the CGL policy. Powerine resolved the question in favor of the insurers, largely regarding its holding as required by Foster-Gardner [see 16 P.3d at 101-02 (duty to defend and duty to indemnify are "correlative")]. The Powerine majority reasoned that if the administrative claim did not trigger the duty to defend, which is broader than the duty to indemnify, the CGL did not logically cover the actual payment of liability created by the administrative proceeding. Rather, the duty to indemnify "is limited to money ordered by a court" and "the duty does not extend to any expenses required by an administrative agency pursuant to an environmental statute." 16 P.3d at 97.

The Powerine court read the policy comprehensively by linking the duty to defend provisions of the policy with the duty to indemnify provisions of the policy. According to the Court,

The provision imposing the duty to defend expressly links "damages" to a "suit," i.e., a civil action prosecuted in a court. For it is in a "suit" that "damages" are sought in some amount through the court's order and "damages" are fixed in their amount through the court's order.

The wider focus of the standard policy within the legal and broader culture also reveals that the duty to indemnify is limited to money ordered by a court.

16 P.3d at 104.

In dissent, Justice Kennard argued that the court's approach was inconsistent with AIU and not compelled by Foster-Gardner. She reasoned that the duty to defend was "broader" than the duty to indemnify only in that the defense obligation extends even to unproven allegations or frivolous claims. There was, in her view, no logic exempting from indemnity coverage the legal liabilities imposed by an administrative agency merely because the insurer had not been required to defend the administrative proceeding. "[T]he principal flaw in [the majority's] analysis is that the term 'suit' nowhere appears in the CCL policy's indemnity provision." 16 P.3d at 114.

In reaching its holding, the Powerine court stated that it rejected a "functional" or "hybrid" approach to discerning contract meaning and was instead adopting a nearly literal approach to the insurance contract. See 16 R3d at 102-03. The policies at issue in the case did not define the word "suit," but the court interpreted the word to mean only formal litigation and not other proceedings. In a footnote, the court noted that CGL policies since 1986 define a "suit" as a "civil proceeding" but was silent as to whether its Powerine holding would apply with more or less force to post-1986 CCL policies. See 16 P.3d at 102, n.3. Arguably, an administrative proceeding is a "civil proceeding" more than it is a "suit" as the word is commonly understood. The dictionary defines a "suit," among other things, as "an action or process in a court for the recovery of a right or claim." See Merriam-Webster's Collegiate Dictionary 1178 (10th ed. 1996) (emphasis added). (1)

In actuality, the Powerine court was taking a functional approach to contract meaning--although perhaps many attorneys and policyholders would disagree with the particulars of the court's functional analysis. The Powerine court, in summarizing the Foster-Gardner decision, noted that Foster-Gardner found that limiting the duty to defend to judicial proceedings did not run counter to the reasonable expectations of the policyholder. What the Foster-Gardner court underemphasized, as did the Powerine court, was the degree to which it was interpreting the CGL so as not to run counter to the reasonable expectations of the insurer.

Implicit in both Foster-Gardner and Powerine is the view of the court that it would be unreasonably beyond the insurer's contractual commitment to require the insurer to defend against administrative actions and to pay funds imposed by government agencies other than courts. The CGL, according to the Powerine court, was designed to defend against lawsuits and to pay judgments rather than to require defense of and payment for types of actions that were not even in existence when the CGL was designed. (2)

Although the court stops short of full self-analysis, it has in effect made the reasonable expectations concept a two-way street in California and found for the insurers based on this factor in Foster-Gardner (no duty to defend administrative actions) and Powerine [no duty to pay for liabilities other than those imposed by courts (and presumably, settled because of pending court actions)]. In other cases of the 1990s, California has found for the policyholder in what attorneys might consider difficult cases. See, e.g., AIU Ins. Co. v. Superior Court, 51 Cal.3d 807, 799 P.2d 1253,274 Cal. Rptr. 820 (1990) ("damages" coverage in CGL includes remedies ordered by court other than strictly legal damages as technically defined); Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 913 P.2d 878. 42 Cal. Rptr. 2d 324 (1995) (actual injury trigger applies to claims of third-party property damage and progressive injury makes for continuous triggering of multiyear liability policies); Aerojet-General Corp. v. T ransport Indem. Co., 17 Cal. 4th 38, 948 P.2d 909, 70 Cal. Rptr. 2d 118 (1997) (same for bodily injury trigger); Vandenberg v. Superior Court, 21 Cal.4th 815, 982 P.2d 229, 83 Cal. Rptr.2d 366 (1999) (duty to indemnify may apply to all liabilities imposed by court, even though a claim was styled as a breach of contract rather than a tort as long as the claim involved covered injury that was not expected or intended by policyholder). But see Prudential-LMI Commercial Ins. v. Superior Court, 51 Cal.3d 674, 798 P.2d 1230, 274 Cal. Rptr. 387 (1990) (manifestation rule governs trigger of first-party property damage claims); Buss v. Superior Court, 16 Cal.4th 35, 939 P.2d 766, 65 Cal. Rptr. 2d 366 (1999) (duty to defend extends to entire case if a single claim is covered, but after resolution, insurer may seek reimbursement from policyholder for cost of defending uncovered claims sufficiently distinct from covered claims); Cates Construction, Inc. v. Talbot Partners, 21 Cal. 4th 28, 980 P.2d 407 (1999) (surety not subject to bad faith tort liability despite its role as similar to insurer).

In short, California insurance law decisions of the past decade are a mix of victories and defeats for insurers and policyholders. One common thread, however, is that the court is attempting to read the policy in a manner consistent with its overall purpose and the reasonable expectations of both the policyholder and the insurer even though the court is expressly professing to be literalist. If the court were using a purely textual approach or applying only the traditional rules of insurance law to these cases, this would appear to augur against the insurers in both Powerine and Foster-Gardner.

In Powerine, the question was whether the term "legally obligated to pay as damages" would seem to, on its face, cover a legal requirement imposed by the executive branch of government as well as by the judicial branch. At least the question is not free from doubt--and where language is ambiguous, it is supposed to be resolved in favor of the policyholder. In addition, terms like "legal" and "obligation" and "damages" are to be given their ordinary meaning rather than a technical meaning. These traditional rules of insurance contract construction would arguably have dictated a different result in Powerine, particularly in light of 1990's AIU holding that "damages" was not to be narrowly construed. However, this assessment was trumped by the Powerine court's view that the CGL should be read comprehensively in light of its purpose and with an eye to party expectations and intent.

Similarly, in Foster-Gardner, a duty to defend against "suits," although seeming to imply court actions, is arguably ambiguous enough to engage the traditional pro-policyholder rules of insurance contract construction discussed above. Operating solely under these rules of the contract interpretation road, one might expect a result favoring the policyholder. But in Foster-Gardner, as in Powerine, the court resolved the issue according to its view of what was the intended purpose of the CGL in light of the parties' understanding, including the expectations of the insurance industry.

Policyholders, of course, may argue that the insurer's expectations are either irrelevant or to the contrary, but for the moment they have lost this jurisprudential battle in California. The Supreme Court is, at least subconsciously, considering the intentions and expectations of insurers in determining the meaning to assign to contested policy provisions. Presumably, however, where the policyholder can demonstrate an objectively reasonable expectation of coverage (or, better still, an inarguably clear textual meaning in its favor), it will prevail even though the insurer had expectations of its own that were not outlandish. Close cases of uncertainty are still likely to be resolved against the insurer. However, in powerine, the California Supreme Court simply did not find it reasonable to expect that the CGL policy would cover liabilities that were not the result of a traditional court proceeding.

Irrespective of the jurisprudential issues and historical analysis, the current bottom line for policyholders facing administrative agency claims for environmental cleanup appears to be as follows: When first faced with the action, the policyholder can argue that a "claim" has been made and that the CGL insurer is responsible for making a reasonable attempt to settle the claim even if the insurer is not required to formally defend the matter. If this strategy is unavailing, the policyholder with sufficient resources should resist the agency and attempt to prompt formal court litigation over the matter, which will trigger the insurer's duty to defend the action and to pay the resulting judgment (absent the applicability of other exclusions such as the pollution exclusion). In considering options, the policyholder's counsel must consider whether activities designed to maximize coverage (e.g., attempting to force a lawsuit) are in the overall best interests of the client (e.g., because of the risks of additional penalties for delay or recalcitrance, criminal prosecution, public embarrassment, etc.).

(1.) By comparison, the same dictionary defines a "proceeding" as a "legal action." See id. At 929. Administrative agency activity directed at forcing cleanup or obtaining funds is arguably a "legal action" even if it is not court litigation.

(2.) See 16 P.3d at 100-05. The court, in a brief historical introduction, stated that the CGL, although periodially revised, "was developed in 1940" (id. at 100), implying that the standard form contract was designed for more traditional legal liabilities than Superfund.
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Author:Stempel, Jeffrey W.
Publication:Journal of Risk and Insurance
Geographic Code:1U9CA
Date:Sep 1, 2001
Words:2658
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