- Two California Supreme Court Decisions in Favor of Insurers
- Legislative Update - Biomaterials Access Assurance Act of 1998
- Tort Reform Repealed: Lessons From California Tobacco Litigation and Legislation
- Must Plaintiffs Plead Causation in Toxic Tort Cases
Two California Supreme Court Decisions in Favor of Insurers
In Foster-Gardner, Inc. v. National Union Fire Ins. Co., 18 Cal. 4th 857 (1998), the California Supreme Court held that an administrative order notifying a policyholder that it was a responsible party for environmental contamination requiring remediation did not constitute a "suit" triggering the insurer's duty to defend under a standard comprehensive general liability ("CGL") policy. It established a bright-line rule with respect to liability insurance policies which purport to require insurers only to defend "suits." The insurer's duty to defend under such a policy is triggered only when a civil lawsuit is filed against the insured. Any proceeding other than a lawsuit is a claim, and under the terms of the policy, the insurer has discretion, but not a duty, to investigate and settle claims.
Foster-Gardner also limits defense costs covered by a CGL policy. Since an insurer's duty to defend is not triggered by anything other than a lawsuit, costs incurred or spent by insureds in responding to administrative directives, in the absence of a lawsuit, are not recoverable as defense costs. It remains unclear whether such expenses are covered under the duty to indemnify. If so, recovery of such expenses would reduce the policy limits otherwise available to the insured.
Since it issued its decision in the Foster-Gardner case, the Court has modified its opinion and removed troubling dicta regarding the scope of the insurer's indemnity obligation as requested by attorneys at Brobeck, Phleger & Harrison, LLP in their Amicus Brief to the Supreme Court. In its original opinion, the Court's dicta stated that its earlier decisions, including AIU Ins. Co. v. Superior Court, 51 Cal. 3d 807 (1990), and Aerojet-General Corp. v. Superior Court, 17 Cal. 4th 38 (1997), support the proposition that a CGL policy covers only those damages which an insured becomes "legally obligated" to pay pursuant to a court order. These comments could have effectively eliminated coverage under standard CGL policies for environmental claims ordinarily resolved in administrative proceedings or through negotiations with state and federal agencies. The dicta is now eliminated. This development clearly favors policyholders.
The Court's conclusions regarding coverage for environmental enforcement proceedings should be limited in application to standard form primary CGL policies. Umbrella and excess liability policies often contain broader coverage that should apply to environmental liability claims, even where those claims arise in the context of an administrative proceeding. For instance, the definition of "Ultimate Net Loss" in most umbrella policies, which defines the scope of the insurer's obligations, typically requires insurers to pay for expenses for defense and investigation of "claims" as well as "suits."
In another pro insurer decision, issued on August 20, 1998, Aydin Corp. v. First State Ins. Co., No. S061699, 1998 Cal. LEXIS 5148, the California Supreme Court held that the insured has the burden to prove that property damage, in the form of environmental contamination, arose out of a "sudden and accidental" event, as that phrase is used in "qualified" pollution exclusions. The Court rejected the policyholder's argument that the "sudden and accidental" provision is not a grant of coverage, but rather determines the scope of the pollution exclusion. Instead, the Court held that the insured has the burden to prove "sudden and accidental" discharges because the effect of this language in the pollution exclusion is to restore coverage that otherwise is excluded (slip op. at 5).
Also in this issue:
- Legislative Update - Biomaterials Access Assurance Act of 1998
- Tort Reform Repealed: Lessons From California Tobacco Litigation and Legislation
- Must Plaintiffs Plead Causation in Toxic Tort Cases