California Supreme Court Agrees To Review State of California v. Underwriters at Lloyd's Of London
(Previously Published at 146 Cal.App.4th 851)

On April 18, 2007, the California Supreme Court agreed to review the California Court of Appeal decision in State of California v. Underwriters at Lloyd's of London, previously published at 146 Cal.App.4th 851 ("Lloyd's"). As we previously reported, the Lloyd's case involved the Stringfellow Site, a Class I Hazardous Waste Site, which the State conceded it negligently designed and constructed in 1956 and which the State operated from 1956 until 1972.

In the published portion of its decision, the Court of Appeal 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 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, which from there, ran 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 implemented its geologist's recommendations.

In 1983, the United States and the 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.

The State's insurers issued liability policies containing "sudden and accidental" pollution exclusions. Some of these policies also contain "watercourse exclusions." The insurers denied coverage for the claims and counterclaims asserted against the State.

The State filed a coverage action against its insurers seeking declaratory relief, breach of contract, and breach of the covenant of good faith and fair dealing. 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 "sudden and accidental" exclusion was the initial deposit of wastes into the site, which was neither sudden nor accidental. 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 rulings on the following arguments were certified 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.

With respect to the first issue, the Court of Appeal rejected the insurers' contention, based on Standun, Inc. v. Fireman's Fund Ins. Co. (1998) 62 Cal.App.4th 882, that the relevant release for purposes of applying the "sudden and accidental" pollution exclusion was the deposit of waste into the site. The Court distinguished Standun because the insured in Standun was held strictly liable as a waste generator that purposefully and regularly disposed of waste at the site. The Lloyd's court concluded that the State's liability for the negligent design, construction and operation of the Stringfellow Site shifted the focus from the initial deposit to subsequent releases from the site.

The Court also rejected the insurers' contention that the watercourse exclusion 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 had previously addressed this issue and out-of-state cases are in conflict. However, the Court was persuaded by Aetna Cas. & Sur. Co. v. Dow Chemical Co. (E.D. Mich. 1998) 28 F.Supp.2d 440, 447, which held the phrase "body of water" means an "aggregate of water having defined boundaries" and not groundwater.

The published portion of the Court's decision also included the Court's holding that coverage was not precluded by 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. In doing so, the Court of Appeal concluded Golden Eagle and Lockheed are incompatible with the California Supreme Court's decision in Partridge.

Partridge 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. In the Court's opinion, Golden Eagle and Lockheed erroneously declined to apply tort principles on the ground an insurer's liability is based on contract. According to the Court, tort principles apply because an insurance policy is a contract to indemnify another for their liability in tort. Neither Golden Eagle nor Lockheed acknowledged Partridge. This, the Court concluded, called into question their reliability as precedent.

Following the Lloyd's decision, petitions for review were filed. In granting the petitions, the Supreme Court indicated it will review (1) the issue of the relevant discharge for purposes of applying the "sudden and accidental" pollution exclusion in the policies at issue, and (2) whether an insurer has a duty to indemnify where damages are caused by covered and uncovered acts or whether the insured has the burden at trial to prove all the damage it seeks to recover were caused by a covered event. The Supreme Court may review other issues, as well, such as the watercourse exclusion and the unpublished portion of the Lloyd's opinion (which discussed regulatory estoppel, the meaning of "sudden and accidental," and the application of the pollution exclusion to various other releases). In light of the Supreme Court's review, the Lloyd's decision is no longer available for use as legal authority.

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