In Foster-Gardner, Inc. v. National Union Fire Insurance Company of Pittsburgh, PA (1998) 18 Cal.4th 857, the California Supreme Court, in a 4-3 decision, held that an order notifying the insured of its responsibility for pollution and demanding remediation is not a "suit" that triggers an insurer's duty to defend.
The decision stemmed from a 1992 order that Foster-Gardner received from the Department of Toxics Substances Control of the California Environmental Protection Agency. Foster-Gardner was ordered to conduct an investigation on how to clean up its site and monitor groundwater, and to draft a remedial action plan.
Foster-Gardner turned to four of its insurers to pay for the cost of defending the company in any resulting administrative proceedings. All of the policies required the insurers to defend a "suit," but the insurers had discretion whether to investigate and settle a "claim." All four insurers declined to defend Foster-Gardner. Thereafter, on August 2, 1994, Foster-Gardner filed an action against its insurers.
In July 1997, the Second District Court of Appeal held that governmental cleanup orders are the equivalent of lawsuits, and ordered the four insurers to pay for the defense.
The supreme court reversed, holding that a bright-line test was needed. In doing so, the court refused to decide whether a claim based on a governmental cleanup order is the functional equivalent of a suit brought in a court of law. The court held that this approach would "open the floodgates of litigation." Rather, the court held that, "[A] reasonable construction of the word 'suit' is a lawsuit." This decision clears up a long-standing area of controversy between insureds and insurers.
Mr. Tang is Editor of the KPC Report and a Director in the firm's Insurance Coverage and Appellate Departments specializing in all matters of insurance. E-mail: kst@kpclegal.com.