Low, Ball & Lynch’s
WEEKLY
LAW RESUME
Coverage
- Damages - Administrative Order Response Costs
CDM
Investors v. Travelers Casualty and Surety
Company
(
Court of Appeal, Sixth
District
This case is another in
a series following from the Supreme Court rulings regarding whether costs
incurred pursuant to an administrative order are covered under an insurance
policy. In this case, the administrative order concerned property environmental
cleanup.
CDM Investors owned
property that they leased to tenants. They were ordered by the California Water
Quality Control Board ("CWQCB")to test the property for
pollutants after it was concluded they were suspected of discharging pollutants
into the soil. CDM notified their insurers of the Board's order and claimed
insurance coverage for the costs to respond. The insurers denied
coverage.
CDM hired a company and
spent approximately $230,000 to comply with the order of the CWQCB. The matter
was eventually closed with the Board taking no further action. CDM then filed
this action, seeking coverage and reimbursement for its legal expenses. The
trial court sustained the demurrer to the
complaint.
On appeal to the Court
of Appeal, the judgment was affirmed. The Court noted that the Supreme Court had
held that policies providing coverage for sums for which the insured became
"legally obligated to pay" as damages provide indemnity only for money judgments
ordered by a court. This is to be distinguished from "expenses," such as ordered
by an administrative agency. The Court held that the duty to indemnify for
damages did not extend to any expenses required by an administrative agency,
pursuant to an environmental statute. Similarly, the duty to defend a suit
seeking damages was restricted to civil proceedings prosecuted in a
court.
In this case, the
relevant insurance policies, although worded slightly differently, all provided
coverage for sums for which the insured became legally obligated to pay as
damages. Thus, there was no obligation to pay for the expenses incurred because
of the order to comply with the decision of the CWQCB
order.
The Court distinguished
the policies in question from ones that have been found to encompass such
expenses. Those policies provide coverage for "ultimate net loss," which was
defined to include sums the insured was obligated to pay through adjudication or
compromise, and sums paid for litigation, settlement, adjustment, investigation,
and expenses. Policies containing such provisions have been held by the
California Supreme Court to encompass the costs incurred pursuant to an
administrative order.
The Court also rejected
without merit CDM's contention that the insurers had a
duty to defend it against affirmative defenses raised by its tenants when it
sued those tenants in Federal Court to recover those response costs. The Court
stated that an insurer has no duty to defend an affirmative defense asserted
against the insured in an insured initiated action.
The judgment of the
trial court was therefore affirmed.
COMMENT
This decision reaffirms
the rule established by the California Supreme Court that there is no obligation
to defend or indemnify the insured for administrative proceedings, absent
language broader than the standard comprehensive general liability
policy.
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