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

By Stempel, Jeffrey W. | Journal of Risk and Insurance, September 2001 | Go to article overview

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


Stempel, Jeffrey W., Journal of Risk and Insurance


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. …

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