Vandenberg v. The Superior Court of Sacramento County, No. S067115
The California Supreme Court recently overturned longstanding California law when it held that the standard insuring agreement in a comprehensive general liability ("CGL") insurance policy may provide coverage when the insured has to pay damages for breach of contract. Since the seminal 1955 decision in Ritchie v. Anchor Casualty Co., 135 Cal. App. 2d, 245 (1955), California courts have repeatedly distinguished between tort damages and contract damages, holding that contract damages are not covered by CGL insurance policies, which limit coverage to amounts an insured is "legally obligated to pay." In Vandenberg, the court apparently put an end to the bright-line distinction between tort and contract.
The underlying action in Vandenberg involved soil and groundwater contamination to a parcel of land that a car dealer named Vandenberg had leased and used as an automobile sales and service facility. Vandenberg.s landlord sued him, alleging that three waste oil storage tanks Vandenberg installed on the property caused the contamination, which was a breach of the lease agreement. In private binding arbitration, the landlord recovered over $4 million in contract damages. Vandenberg.s insurers rejected his request for indemnification. Vandenberg then initiated coverage litigation against his carriers.
On appeal from the trial court.s grant of some carriers. motions for summary adjudication, the Supreme Court held that CGL insurance policies covering amounts that the insured is "legally obligated to pay as damages" do not necessarily preclude coverage for property damage pled as contract damages. In rejecting the technical distinction between tort and contract damages, the Court found that a "determination of coverage must be made individually by considering .the nature of [the] property, the injury, and the risk that caused the injury, in light of the particular provisions of each applicable insurance policy,." rather than on the legal theory asserted by the claimant.
After its reasoned rejection of the tort-versus-contract distinction, the Court next applied settled principles of insurance contract interpretation to Vandenberg.s insurance policies to determine the scope of their coverage. The Court interpreted the phrase "legally obligated to pay as damages" in its ordinary and popular sense, because there was no evidence that the parties to the insurance policies attributed any special or legalistic meaning to that language. The Court further reasoned that "a reasonable layperson would certainly understand .legally obligated to pay. to refer to any obligation which is binding and enforceable under the law whether pursuant to contract or tort liability." Based on these principles of contract interpretation, the Court concluded that Vandenberg.s insurers could not avoid coverage for property damage solely on the ground that damages were assessed on a contract claim instead of a tort theory.
A narrow reading of Vandenberg is that an injured third party cannot control insurance coverage simply by choosing a particular remedy, which is consistent with the Court.s holding in AIU Ins. Co. v. Superior Court, 51 Cal. 3d 807 (1990). The practical impact of Vandenberg is that it will require insurers to look at the nature of the damages claimed rather than focusing on the claimant's theory of recovery. After Vandenberg, insurers may no longer deny a defense to claims for property damage or bodily injury merely because the claimant seeks recovery only on a contract theory rather than in tort.
We do not expect the duty to defend garden variety claims for breach of contract to be affected by Vandenberg. The Court's seminal decision in Waller v. Truck Ins. Exch., 11 Cal.4th 1 (1995), holding that claims based on purely economic loss are not covered by the standard CGL language, remains good law.
We do expect, however, that attorneys for policy holders will read Vandenberg much more expansively. The ruling undoubtedly opens a gateway for policyholders to at least attempt to recharacterize contract-based claims as claims for property damage, even if the damages suffered by the claimant are more in the nature of economic losses.
In particular, there may be opportunities for claimants to shoehorn what used to look like pure contract claims into the "loss of use" portion of the CGL property damage definition, a provision which has not been interpreted in many decisions Still, any uncertainties raised by Vandenberg can likely be eliminated in the future by drafting policy exclusions accordingly.
In a 4-2 decision, the Vandenberg Court also ruled that a private arbitrator's findings are not binding in favor of persons who were not parties to the arbitration in subsequent litigation, unless the arbitral parties so agree. In applying this ruling, the Court held that the arbitrator's finding that the contamination from the three waste oil storage tanks was not "sudden and accidental," which would have excluded coverage under Mr. Vandenberg's CGL policies that included a standard pollution exclusion, could not be used by the insurers who issued the policies to deny coverage and estop Mr. Vandenberg from re-litigating the question.
This ruling is particularly interesting because in proceedings in court, the opposite rule applies: A finding against a party in one trial may be used against that party in a later proceeding, even by a person who was not a party to the first trial. The Vandenberg court's ruling that arbitrators' findings are not similarly binding will be an important factor for litigants deciding whether to proceed to trial or agree to binding arbitration, especially if either party anticipates related litigation down the road.