State of California v. Underwriters at Lloyd's of London
(2006) 146 Cal.App.4th 851

Applying State Farm Mut. Auto Ins. Co. v. Partridge (1973) 10 Cal.3d 94, Summary Judgment In Favor Of Insurers Is Unwarranted Even Though Insured Admitted Inability To Allocate Damages Between Those Caused By Nonexcluded Releases of Pollutants And Excluded Releases

The California Court of Appeal for the Fourth District reversed the trial court's grant of summary judgment in favor of four insurers concluding that the record raised a triable issue of fact as to whether the liability of their insured, the State of California, as designer and operator of the Stringfellow Acid Pits, was for discharges within the "sudden and accidental" exception to the pollution exclusion in the insurers' policies.

In the published portion of its decision, the Court concluded that Golden Eagle Refinery Co. v. Associated Internat. Ins. Co. (2001) 85 Cal.App.4th 1300 ("Golden Eagle") and Lockheed Corp. v. Continental Ins. Co. (2005) 134 Cal.App.4th 184 ("Lockheed") are incompatible with the California Supreme Court's decision in State Farm Mut. Auto. Ins. Co. v. Partridge (1973) 10 Cal.3d 94 ("Partridge"). It held, applying Partridge, that the State would be entitled to full coverage even if damage was partially caused by an excluded event and the damage was indivisible. The Court also concluded the relevant discharges were not the deposits of waste into the site but releases from the site and rejected the application of the watercourse exclusions in the insurers' policies.

In an unpublished portion of its opinion (and therefore unavailable for use as legal authority), the Court rejected the State's regulatory and judicial estoppel arguments and addressed contentions concerning the application of the pollution exclusion to certain releases.

A petition for review of the Court's decision or, alternatively, for depublication, is pending before the California Supreme Court and is scheduled to be disposed of on or before May 3, 2007.

The State opened the Stringfellow site as a Class I Hazardous Waste Site in 1956. The State, which conceded it negligently designed and constructed the site, operated it from 1956 until 1972.

In March of 1969, a "once-in-50-year" rainstorm inundated the site causing polluted rainwater to overflow and escape through a washed out section of a dike around the site. Groundwater contamination was discovered in 1972 and the State closed the site. Signs of leakage were observed in 1973. In 1974, the State's chief geologist recommended the installation of a hydraulic barrier and impervious cap to protect against subsurface releases and overflows.

The recommended measures were not taken and, following heavy rains in early 1978, the site began to overflow again on March 5, 1978. The State then made two "controlled discharges" of more than one million gallons of rain-diluted wastewater into a nearby creek and, from there, across a roadway, down a channel, across another street, and into the Santa Ana River. The 1978 releases would not have occurred had the State heeded its geologist's recommendations.

In 1983, the United States and State brought a cleanup action against companies that had disposed of waste at the site. These companies counterclaimed against the State which was held liable for past and future remediation costs.

Allstate Insurance Company, Century Indemnity Company, Columbia Casualty Company and Westport Insurance Corporation issued excess general liability policies to the State affording coverage from September, 1976 to May, 1978. Allstate, Century and Westport issued substantially similar policies using the then-standard 1966 CGL form. The Allstate, Century and Westport policies all contain a pollution exclusion, added to the standard CGL policy in 1970, which provides that the policy does not apply to damage:

arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land or the atmosphere, but this exclusion does not apply if such discharge, dispersal[,] release or escape is sudden and accidental.

These policies also contain a "watercourse exclusion" which states:

It is further agreed that the Policy does not apply to Personal Injury or Property Damage arising out of the discharges, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, wa[s]te materials or other irritants, contaminants or pollutants into or upon any watercourse or body of water.

The Columbia policy also contained a "sudden and accidental" pollution exclusion. However, the exclusion in the Columbia policy was also applicable to "discharges to any watercourse of body of water" in addition to discharges into or upon land or the atmosphere.

The State filed a coverage action against the four insurers involved in this decision and about 25 others seeking declaratory relief, breach of contract, and breach of the covenant of good faith and fair dealing. The State alleged that the insurers' denials of coverage in response to the State's demand for indemnity against liability arising from the judgment in the federal cleanup action was improper.

The insurers moved for summary judgment in 2004. The trial court granted the motion, holding that the 1969 and 1978 releases were excluded because the relevant release triggering the application of the exclusion was the deposit of wastes into the site. Even if the subsequent releases of contaminants from the site were "sudden and accidental," the trial court concluded they would not provide a basis for coverage. The trial court also applied the watercourse exclusion and held the State was required to allocate damage between covered and uncovered causes and failed to do so.

The State advanced several arguments on appeal. Only the Court of Appeal's decision on some of these arguments was issued for publication: (1) whether the relevant discharge for the purpose of applying the pollution exclusion is the deposit of wastes into the landfill or releases from the site; (2) the application of the watercourse exclusion, and; (3) allocation between covered and uncovered losses.

Published Portion of Opinion

The Court rejected the insurers' contention, based on Standun, Inc. v. Fireman's Fund Ins. Co. (1998) 62 Cal.App.4th 882, 889, 891, that the relevant release is the deposit of waste into the site. The Court distinguished Standun because the insured in Standun was not responsible for the operation of the disposal site but was strictly liable as a generator of wastes purposefully and regularly disposed of at the site. The Court concluded that the State's liability for the negligent design, construction and operation of the Stringfellow site shifted the focus onto the releases from the site.

The Court also rejected the insurers' contention that the watercourse exclusion, absolute in the Westport, Allstate and Century policies, applied. It held that there were factual issues as to whether, even initially, discharges went directly to the nearby creek. The Court also rejected the insurers' contention that the initial discharge is the only relevant discharge when applying the watercourse exclusion. The Court further held that a discharge of pollutants into groundwater does not fall within the watercourse exclusion. No reported California authorities address this issue and out-of-state cases are conflicting. However, the Court was persuaded by the conclusion of the court in Aetna Cas. & Sur. Co. v. Dow Chemical Co. (E.D. Mich. 1998) 28 F.Supp.2d 440, 447, that the phrase "body of water" means an "aggregate of water having defined boundaries" and not groundwater.

The Court's published decision also held that the State's admission that it could not differentiate work performed or expenses paid to remediate property damage caused by covered releases from damage caused by uncovered releases did not preclude coverage.

The Court considered Golden Eagle and Lockheed, which held that the insured must prove that all of the damages it seeks to recover were caused by a covered event in order for the insurer to have a duty to indemnify. It concluded that these decisions were contrary to the decision of the California Supreme Court in Partridge which held, in the context of an automobile exclusion in a homeowners' policy, that where multiple concurrent causes combine to cause damage, the insured is covered so long as one cause is covered.

When, due to the application of principles of tort liability, an insured would be liable for all damages even if it were liable only because of the covered cause, the Court held an exclusion from coverage is not a defense to coverage. The Court of Appeal concluded that Golden Eagle and Lockheed both erroneously rejected reliance on tort principles by noting that the basis for an insurer's liability is contract. The Court found this conclusion incorrect because an insurance policy is a contract to indemnify another for their liability in tort. Further, the Court pointed out that neither the Golden Eagle nor the Lockheed decision acknowledged they conflicted with Partridge, or even acknowledged Partridge at all. This, the Court concluded, called into question their reliability as precedent.

The Court did note that an insurer can limit coverage to only those damages caused by a covered cause where the damage is divisible. It also pointed out that an insured's admission that damages are indivisible is not binding on its insurers.

Unpublished Portion of Decision

The Court of Appeal addressed the State's estoppel arguments in the unpublished portion of its decision. Noting that no California published authority had discussed regulatory estoppel, it described the doctrine as precluding insurers from asserting an "inconsistent" position in coverage litigation if they had previously represented to insurance regulators that the pollution exclusion continued coverage for pollution caused by an accident without noting its temporal requirement.

The Court concluded the State had waived the right to assert regulatory estoppel on appeal by failing to raise it in the trial court. The insurers had represented that had estoppel been raised in the trial court they would have marshaled evidence that California regulators had not relied on any insurance industry representations about the meaning of the "sudden and accidental" pollution exclusion.

In response to the State's contention that it could rely on general drafting history without proving it was relied on by California regulators, the Court of Appeal noted the difference between relying on drafting history for the purpose of interpreting policy provisions and its use as a basis for claiming regulatory estoppel. Neither Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 1007, 1028, n. 10, nor MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635, 644, cited by the State, supports reliance on generalized drafting history as the basis for a regulatory estoppel claim.

The Court of Appeal also noted that "the vitality of the regulatory estoppel doctrine as a general principle of law is dubious." Given the lack of an adequate factual record, the Court declined to determine whether California law should adopt the doctrine.

While noting that judicial estoppel is well-established in California, the Court similarly concluded that the State had waived the right to rely on the doctrine and failed to present an adequate factual record to support its application. The Court rejected the State's citation to an opinion issued by the United States District Court for the District of Massachusetts involving Allstate because the opinion did not show what position Allstate had taken in that case or whether Allstate had prevailed. Further, the decision was issued before California authorities had held "sudden and accidental" meant abrupt (see (Shell Oil Co. v. Winterthur Swiss Ins. Co. (1993) 12 Cal.App.4th 715, 754; ACL Technologies, Inc. v. Northbrook Property & Casualty Co. (1993) 17 Cal.App.4th 1773, 1779; Truck Ins. Exchange v. Pozzuoli (1993) 17 Cal.App.4th 856, 861; Travelers Casualty & Surety Co. v. Superior Court (1998) 63 Cal.App.4th 1440, 1456) and did not support the conclusion, required to prove judicial estoppel, that Allstate had previously taken a "totally inconsistent" position.

Turning to the meaning of the "sudden and accidental" exception, the Court declined to depart from the holdings of the other Courts of Appeal in California that it has a temporal meaning. The Court expressly rejected the State's argument that drafting history should be looked to without a finding that a provision is ambiguous, noting that the California Supreme Court's reference to drafting history in Montrose, supra, 10 Cal.4th at 669, 671, was to confirm its interpretation and to evaluate the insurers' contention that the insurance industry had never anticipated the interpretation proffered.

The Court found that the 1969 release due to the overflow of polluted rainwater from the washout of the dike was both unexpected and abrupt. Although the State may have "known" in theory that a significant rainfall would cause an overflow, the Court appears to have concluded that given the unusual nature of the 1969 rains the State could not be held to have "expected" the overflow "[i]n any ordinary, reasonable sense of the word."

The Court viewed the 1978 releases differently. They were not unexpected and were therefore not "accidental." The Court relied on the 1969 overflow, coupled with the State geologist's 1973 recommendations for the installation of a hydraulic barrier and impervious cap, which went unheeded, to conclude that the State "expected" another overflow might occur. The Court rejected the State's contention that measures taken which the State hoped would prevent an overflow did not sufficiently reduce the potential for overflows to negate the expectation that they would occur.

This opinion may be depublished, or review could be granted. These events would render this decision unavailable for use as legal authority.

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