Low, Ball & Lynch’s

WEEKLY LAW RESUME

September 8, 2005 Issue   By: Ray Coates

Coverage – Administrative Proceedings – Duty to Defend and Indemnify

Powerine Oil Company, Inc. v. Superior Court

County of San Diego v. Ace Property & Casualty Ins. Co.

California Supreme Court

(August 29,  2005)

The California Supreme Court held in Foster-Gardner, Inc. v. National Fire Insurance Company (1998) 18 Cal.4th 857 that an insurer’s duty to defend the insured in a “suit seeking damages” under the wording of a standard CGL policy is limited to civil suits prosecuted in court.  These two cases involved excess/umbrella policies which contained language similar to, but not identical to, the standard primary CGL policy. 

In Powerine, Powerine Oil Company faced liability for governmentally imposed clean-up and abatement orders requiring it to remediate soil and groundwater pollution resulting from past refining operations at various sites.  Central National Insurance Company of Omaha, which issued nine excess/umbrella liability policies to Powerine, moved for summary adjudication on the basis that it had no duty to indemnify Powerine for any sums spent pursuant to these clean-up and abatement orders.  Central National relied on the fact that there were no “damages” because these costs were paid by Powerine outside the context of litigation and thus were not court ordered.  In the Central National policies, in addition to the standard language, the policies obligated Central National to pay for expenses caused by or arising out of each occurrence.  Furthermore, the definition of damages incorporated the term “ultimate net loss” which included sums incurred either through adjudication or compromise and for litigation, settlement, adjustment and investigation of claims and suits, paid as a consequence of an occurrence.  The trial court granted the Central National motion.  This case came to the Supreme Court after the Court of Appeal granted Powerine’s petition and held that Central National had a duty to indemnify Powerine because the language was broader than the standard CGL policy.

In the County of San Diego case, Ace Property & Casualty Insurance Company insured the County.  The County was ordered, under a clean-up and abatement order, to investigate and clean up a County landfill.  In addition, the County settled adjacent property owner claims by purchasing their property.  The County sought indemnification from Ace for these costs.  Ace refused, stating that its language contained the standard language of a CGL policy limiting it to pay for damages caused by personal injury or property damage.  The trial court granted the Ace motion for summary judgment.  The Court of Appeal affirmed.  The Supreme Court granted review to consider this case along with the Powerine case. 

In the Powerine case, the Supreme Court unanimously affirmed a finding of coverage.  The Court felt the Central National policy language which added the word “expenses” in the insuring clause extended coverage beyond the definition of the term “damages” and thus provided coverage beyond money ordered by a court.  In addition, by using the term “ultimate net loss,” which included sums the insured became legally obligated to pay through compromise or settlement or adjustment and investigation of claims, the promise to pay was broadened beyond sums awarded by a court.  Further, by having language promising to indemnify for compromise or settlement of a claim, the coverage included matters initiated by the administrative agency.  The language of the Central National excess/umbrella policies included expenses incurred in responding to government agency orders administratively imposed outside the context of a government lawsuit relating to clean-up and abatement of an environmentally polluted site.  The excess policies also contained language providing coverage for occurrences not covered by underlying insurance.  Thus, coverage broader than primary coverage was provided.

In the County of San Diego case, the decision was affirmed, but barely.  A majority of Justices agreed that since the policy language of the Ace policy contained only the “damages” limitation, there was no coverage for costs and expenses incurred by the County in responding to administrative orders to clean up and abate soil or groundwater contamination.  Similarly, there was no coverage for the property buy-out settlements.  This was fortified by the No Action Provision and the No Voluntary Payment Provisions of the policy. 

However, three Justices expressed doubts as to the Foster-Gardner rationale.  Two concurred in the judgment but indicated they had questions regarding the soundness of the prior decisions in this regard.  A third dissented and indicated she would not limit the word “damages” in indemnity provisions of the Ace policy to money ordered by a court.

COMMENT

There is a current opening on the California Supreme Court.  When a new Justice is appointed, that Justice will become the swing vote on whether the Foster-Gardner rationale will continue or will be reconsidered by the Court with perhaps a more expansive definition of “damages” adopted.

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