Tuesday, August 30, 2005
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High Court Clarifies Contentious Environmental Coverage Issue
By DAVID WATSON, Staff Writer
Ruling in a pair of cases yesterday, the state Supreme Court reiterated that “damages” in an insurance policy means only court-ordered payments, but said that policies with broader language may require insurers to cover the costs of administratively ordered environmental cleanups.
One of rulings interpreted identical language in nine “excess/umbrella” insurance policies issued by Central National Insurance Company of Omaha to Powerine Oil Company, a now-defunct refinery that faces cleanup and abatement orders for groundwater and soil contamination at a variety of locations.
The justices unanimously rejected Central National’s contention that coverage was barred under the court’s 2001 decision in Certain Underwriters at Lloyd’s of London v. Superior Court (Powerine Oil Company), 24 Cal.4th 945. In that case the court said that “damages” in a standard comprehensive general liability insurance policy means only “money ordered by a court,” and does not include cleanup costs ordered by an administrative agency under an environmental statute.
Agreeing with this district’s Court of Appeal, Justice Marvin Baxter said that the language in Central National’s standard excess/umbrella policy went “well beyond” that of the standard CGL policy, and also beyond the language in the policy at issue in the other case the high court decided yesterday.
Though he noted that other policy provisions and exclusion clauses remain to be litigated, Baxter said Central National’s policy language was “broad enough to include coverage for the liability of environmental cleanup and response costs ordered by an administrative agency.”
He added:
“Under a literal reading of these policies, we conclude such would be the objectively reasonable expectation of the insured.”
The policy obligated Central National to indemnify Powerine for damages “and expenses, all as more fully defined by the term ‘ultimate net loss’ on account of:....property damage...caused by or arising out of each occurrence happening anywhere in the world.”
‘Ultimate Net Loss’
In defining “ultimate net loss,” the policy said it included both “the total sum which the Insured, or any company as his insurer, or both, become obligated to pay by reason of...property damage...either through adjudication or compromise” and “hospital, medical and funeral charges and all sums paid as salaries, wages, compensation, fees, charges and law costs, premiums on attachment or appeal bonds, interest, expenses for doctors, lawyers, nurses and investigators and other persons, and for litigation, settlement, adjustment and investigation of claims and suits which, are paid as a consequence of any occurrence covered hereunder....”
Baxter reasoned that the phrase “obligated to pay by reason of the liability...imposed upon the Insured by law” in the policy was “the functional equivalent of the phrase ‘sum that the insured becomes legally obligated to pay’ in the standard CGL policy.”
He continued:
“In the standard primary CGL policy, it is the addition of the single word ‘damages’ that limits the indemnification obligation to money ordered by a court....The insuring clause of the Central National excess/umbrella policies, in contrast, provides indemnification coverage for ‘damages, direct or consequential and expenses....’”
In the 2001 case, he noted, “we ourselves used the term ‘expenses’ when explaining that ‘expenses required by an administrative agency pursuant to an environmental statute, whether for the cleanup of a contaminated site and the abatement of the contamination’s effects or otherwise, do not constitute money ordered by a court.’.... Surely then, an insured would harbor an objectively reasonable expectation that these policies also afforded coverage for such expenses, something above and beyond court-ordered ‘damages.’”
The references in the definition of “ultimate loss” to “compromise” and “settlement” also suggested that broader coverage was intended, the justice said.
‘Property Damage’
He pointed out that in AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807 the high court interpreted “property damage” under a standard CGL policy to include court-ordered payment of the costs of pollution remediation or abatement.
“It follows,” the justice said, “that where the express insuring language of an excess/umbrella policy broadens indemnity coverage for sums paid in furtherance of a ‘compromise’ or ‘settlement’ of a ‘claim’ initiated by an administrative agency for such remedial relief, the insured’s liability for such expenses falls within the policy’s indemnification obligation even though no government suit was filed.”
Baxter rejected Central National’s argument that finding coverage would render the term “damages” in the policy redundant.
“The term ‘damages’ in these policies,” Baxter declared, “serves the same purpose that it does in the standard primary CGL policy—it extends the indemnity obligation to ‘money ordered by a court’ in a suit against the insured. Were the term not included in the policy language, the insurer could be heard to argue that coverage is not provided for court-ordered money judgments.”
In the other case decided yesterday, the court held that the term “damages” in a nonstandard excess liability policy issued to San Diego County had the same limiting effect as in a standard CGL policy. The “central insuring provision” in the policy issued by Ace Property & Casualty Insurance Company “likewise obligates Ace to indemnify the County for all sums the insured becomes obligated to pay by reason of liability imposed by law for ‘damages’ resulting from the destruction or loss of use of tangible property,” Baxter reasoned.
Justice Ming Chin and Chief Justice Ronald M. George joined in Baxter’s opinion in the second case. Justices Kathryn M. Werdeger and Carlos Moreno concurred separately, saying they felt bound by the court’s 2001 Powerine decision.
Werdeger noted she dissented in that case, and said it should be reconsidered. Moreno noted that the court, in granting review in the San Diego County case, had not been asked to revisit the holding of the first Powerine ruling, but said he was “uncertain...of the soundness” of that ruling and of the court’s 1998 decision in Foster-Gardner, Inc. v. National Union Fire Ins. Co., 18 Cal.4th 857, another ruling from which Werdegar dissented.
Justice Joyce L. Kennard, noting her dissent in 2001 case, filed a partial dissent.
The cases are Powerine Oil Company, Inc. v. Superior Court (Central National Insurance Company of Omaha), 05 S.O.S. 4228, and County of San Diego v. Ace Property & Casualty Insurance Company, 05 S.O.S. 4221.
Copyright 2005, Metropolitan News Company