Low, Ball & Lynch's

WEEKLY LAW RESUME

October 23, 2003 Issue By: Raymond Coates

Coverage - Response Costs - Pollution

CDM Investors v. American National Fire Insurance Company

Court of Appeal, Sixth District

(October 15, 2003)

This is another in the series of cases dealing with the duty of an insurer to provide coverage for response costs incurred pursuant to an administrative order that charged the insureds with being suspected dischargers of pollutants causing damage to soil and groundwater.

CDM Investors (CDM) owned real property they leased to tenants. The California Water Quality Control Board (CWQCB) ordered CDM to test the property for pollutants after CWQCB concluded CDM was a suspected discharger of pollutants causing damage to soil and groundwater. CDM tendered to its insurers claiming insurance coverage for the cost to respond. Coverage was denied. Following settlement of the charges, CDM sued American National Fire Insurance Company and others to recover the cost. The trial court sustained a demurrer to the complaint and dismissed it. CDM Investors appealed.

The Court of Appeal affirmed. Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857, and Certain Underwriters at Lloyd's London v. Superior Court (Powerine) (2001) 24 Cal.4th 945, hold that general liability insurers are only required to defend civil actions prosecuted in a court and do not have a duty to defend claims, such as administrative proceedings before various agencies. The same is true as to the duty to indemnify. CDM argued that a Great American 1984 primary policy was required to defend and indemnify because a reservation letter failed to reserve coverage based on a lack of a lawsuit. The Court denied this ground holding waiver only occurs when there is an intentional relinquishment of a known right. There is no implied waiver of a coverage defense. Further, there was no allegation of estoppel.

As to a 1987 Great American primary and umbrella policy and a TIG 1989 primary policy, it was argued that Foster-Gardner and Powerine did not apply because these policies defined a suit as a "civil proceeding." However, these policies also had an absolute pollution exclusion. The Court held that these policies therefore did not apply to this claim since it was excluded by the policy's government directed costs paragraph of the pollution exclusion.

As to Great American 1984 and 1985 umbrella policies, it was contended that they indemnified for "ultimate net loss" which was broader than the term "damages." The Court, however, noted that the ultimate net loss language related to legal obligations the insured paid for "damages." The Court therefore disagreed that this expanded the definition of the policy to include administrative proceedings. While the Court noted that payment of such expenses might have obviated a lawsuit and might have benefitted society as a whole, the Court declined to rewrite the insurance policy. Finally, CDM sued its former tenants in federal court, and the tenants raised affirmative defenses. It was argued the affirmative defenses triggered a duty to defend. The Court stated that an insurer ordinarily has no duty to defend an affirmative defense asserted against the insured in an insured-initiated action. The Court noted that a duty to defend may be triggered where an affirmative defense might have been a suit for damages if asserted in a court of law and might trigger a duty to defend if it fell within the scope of the insurance policy. Here, however, the affirmative defenses were primarily an indemnity claim by the tenants back against the landlord and was purely defensive in nature. It therefore was not the equivalent of an allegation seeking affirmative relief that could have been asserted as a claim for damages and which in turn might have constituted a suit for damages within the meaning of the usual CGL policy duty to defend provisions.

The trial court decision was therefore affirmed.

COMMENT

This case continues the trend of cases refusing to hold an insurer has a duty to defend or indemnify its insured for an administrative proceeding. A contrary decision is reached only in those cases where language is different from that of the standard CGL policy. ____ To order a printed version of this analysis, or change your subscription information, reply to this transmission. Information regarding this and other WEEKLY LAW RESUME TM articles is available from Raymond Coates at

(650) 685-7160, RCoate[email protected] or at WWW.LOWBALL.COM. The WEEKLY LAW RESUME TM is published fifty-two times a year, and is a complimentary publication of LOW, BALL & LYNCH, Attorneys at Law, a Professional Corporation, with offices in San Francisco, Redwood City and Monterey, California.

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