California Appellate Court Finds Coverage for Administrative Actions Under Excess/Umbrella Policies Containing Broader Insuring Language Than Standard CGL Policies

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California Appellate Court Finds Coverage for Administrative Actions Under Excess/Umbrella Policies Containing Broader Insuring Language than Standard CGL Policies

By David S. Cox and Jason B. Komorsky

With timing befitting the holiday season, a unanimous California Court of Appeal reaffirmed fundamental principles of insurance policy interpretation and delivered a critical victory to California policyholders in the environmental insurance coverage arena, holding that administratively imposed environmental “response costs” fall within the expansive coverage grant afforded by general liability “umbrella” policies. Powerine Oil Co. v. Superior Court (Powerine II), 2002 WL 31859568 (Cal. App. 2 Dist. Dec. 23, 2002). The decision is the “logical extension” of the interpretative principles espoused by the California Supreme Court in the companion case involving the same parties and administrative proceedings, Certain Underwriters at Lloyd’s of London v. Superior Court (Powerine I), 24 Cal. 4th 945 (2001) (denying coverage for administrative claims under comprehensive general liability primary policies), although at first blush the results reached by the Powerine I and Powerine II Courts appear diametrically opposed. As is always the case in California, the answer to insurance coverage questions is found in the policy language at hand, and the seeming dichotomy of the results in Powerine I and Powerine II flows from the material distinctions between the primary policy language at issue in Powerine I and the umbrella policy language addressed in Powerine II. See Horton and Cox, The Powerine Paradox, 24-Sep. L.A. Law. 41 (2001) (discussing distinctions).

In Powerine I, the California Supreme Court construed the insuring agreement in the standard form comprehensive general liability policy, which promises to indemnify the policyholder for “all sums” the insured becomes “legally obligated to pay as damages” and to defend “suits” asserted against the insured seeking “damages.” In part because of the defense provision’s limitation of coverage to “suits” (i.e., a court proceeding - see Foster-Gardner, Inc. v. National Union Fire Ins. Co., 18 Cal. 4th 857 (1998)), the Powerine I Court concluded that the phrase “legally obligated to pay as damages” was limited to “money ordered by a Court” and therefore administratively imposed environmental liabilities were outside the aegis of the insuring agreement. The umbrella policy language at issue in Powerine II was dramatically different:

“The Company hereby agrees . . . to indemnify the Insured for all sums which the Insured shall be obligated to pay be reason of the liability . . . imposed upon the Insured by law . . . for damages, direct or consequential, and expenses, all as more fully defined by the term ‘ultimate net loss’ on account of: . . . property damage. . . .”

Powerine II, Slip Op. at 5-6. In turn, ultimate net loss was defined as:

“the total sum which the Insured, . . . become[s] obligated to pay by reason of . . . property damage. . . either through adjudication or compromise, and shall also include . . . law costs . . . for litigation, settlement, adjustment and investigation of claims and suits which, are paid as a consequence of any occurrence covered hereunder . . .”

Id. As discussed herein, the distinctive features of the umbrella policy insuring agreement proved dispositive to the Powerine II Court:

“. . . it is clear that the nine Central National umbrella policies issued to Powerine beginning in 1973 provided coverage for costs Powerine incurs in complying with the cleanup and abatement orders issued by the administrative agencies when no lawsuit is filed. As umbrella policies, they provide broader coverage than the coverage contained in the primary policies, and in particular, insure for losses not covered by the primary policies.” Powerine II, Slip Op. at 31.

Rules of Policy Interpretation

The Court of Appeal framed its analysis within a rich line of California precedent, reciting familiar precepts of insurance policy interpretation:

g The fundamental goal of contractual interpretation is to give effect to the mutual intent of the parties, which should be inferred, if possible, solely from the written provisions of the contract.

g If contractual language is clear and explicit, it governs.

g A policy provision will be considered ambiguous when it is capable of two or more constructions, both of which are reasonable.

g If ambiguity is not eliminated by the language and context of the policy, it generally will be construed against the insurer in order to protect the insured’s reasonable expectation of coverage.

Powerine II, Slip Op. at 8-9 (citing Foster-Gardner, 18 Cal. 4th at 868).

The California Supreme Court’s Holdings in Foster-Gardner and Powerine I

Armed with these rules of construction, the Court of Appeal reviewed the linked Foster- Gardner and Powerine I decisions in concluding that the analytical approach articulated by those decisions compelled the determination that the umbrella policy language before it furnished coverage for expenses required by environmental statutes.

In Foster-Gardner the California Supreme Court took a “literal approach” in interpreting the meaning of the word “suit” as “denot[ing] only a court proceeding initiated by the filing of a complaint.” Powerine II, Slip Op. at 10. In applying the holding in Foster-Gardner to the policies at issue here, the appellate court noted the Supreme Court’s distinction between “a ‘suit,’ i.e., a civil action in a court commenced by a complaint,” and “a ‘claim,’which can be initiated by an administrative proceeding.” Powerine II, Slip Op. at 10-11. Based on its interpretation of the word “suit” -- which it found unambiguous -- the California Supreme Court concluded that an insurance company had no duty to defend an administrative action. In so concluding, the Foster-Gardner court was presented with the standard CGL insuring agreement’s promise to defend “suits”:

“the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, . . . and may make such investigation and settlement of any claim or suit as it deems expedient. . . .”

Id.

In Powerine I, the California Supreme Court closed the circle it began to draw in Foster- Gardner, considering whether the “indemnity” prong of the standard CGL insuring agreement -- i.e. the promise to pay all sums the insured is “legally obligated to pay as damages” – embraced environmental response costs imposed by regulatory bodies. The holding in Foster-Gardner exerted a gravitational influence on the Powerine I Court’s analysis:

“the duty to defend is broader than the duty to indemnify. The duty to defend is not broad enough to extend beyond a ‘suit,’ i.e., a civil action prosecuted in a court, but rather is limited thereto. A fortiori, the duty to indemnify is not broad enough to extend beyond ‘damages,’ i.e., money ordered by a court, but is rather limited thereto.”

Powerine II, Slip Op. at 11-12 (quoting Powerine I, 24 Cal. 4th at 961). Accordingly, the Powerine I court limited the duty to indemnify solely to “money ordered by a court” based on (i) the Foster-Gardner syllogism and (ii) its “literal” interpretation of the term “damages” within the context of the standard CGL policy: “expenses required by an administrative agency pursuant to an environmental statute, whether for the cleanup of a contaminated site and the abatement of the contamination’s effects or otherwise, do not constitute money ordered by a court.” Powerine II, Slip Op. at 12-13 (quoting Powerine I, 24 Cal. 4th at 974 (emphasis added by Powerine II Court)).

Viewing Foster-Gardner and Powerine I collectively, the Powerine II court distilled the following bright line proposition:

“the duty to defend a ‘suit’ seeking ‘damages’ under the standard CGL policies is restricted to civil actions prosecuted in a court, initiated by the filing of a complaint, and does not include claims, which can denote proceedings conducted by administrative agencies under environmental statutes. Likewise, the duty to indemnify for ‘all sums that the insured becomes legally obligated to pay as damages’ (Powerine I, supra, 24 Cal.4th at p. 961, italics added) in the same standard primary policies is limited to money ordered by a court, and does not include expenses such as may be incurred in responding to administrative agency orders.”

Powerine II, Slip Op. at 13. In Powerine II, however, the Court of Appeal recognized that it was presented with coverage questions arising out of a policy that explicitly provided coverage for “damages” and “expenses”; for “adjudications” and “compromises”; and for “claims” and “suits.”

Applying Foster-Gardner and Powerine I, the Powerine II Court Found that the Non- Standard Excess/Umbrella Policy Before It Provide Coverage for Administrative Proceedings

The Powerine II Court was asked to resolve whether the excess/umbrella policy “impose[s] on the insurer a duty to indemnify the insured for the costs incurred to negotiate and comply with administrative-agency environmental orders.” At the outset, the Powerine II court noted that it was reviewing the language of “excess/umbrella policies,” not the standard CGL policies that were the subject of Foster-Gardner and Powerine I.

As noted , the language in the policy at issue in Powerine II provided the following indemnity language:

Powerine II, Slip Op. at 4-5. In turn, ultimate net loss was defined as:

Id.

The Powerine II court distinguished the scope of coverage afforded by the excess/ umbrella policy from the standard CGL policy based on the use of the terms “expenses,” “compromise,” and “claims” in the excess/umbrella policy.

First, based on the addition of the term “expenses” in the coverage grant of the excess/umbrella policy, the Powerine II court distinguished the scope of the standard CGL policy which only provided coverage for damages. “By supplementing “damages” with “expenses,”1 the umbrella policy have created a category of indemnifiable costs separate and independent from “damages” and has thus extended its coverage beyond the limitation imposed were the term “damages” used alone.

Second, based on the use of the word “compromise” in the ultimate net loss provision as an alternative to the word “adjudication,” the Powerine II court concluded that a compromise may be reached before a lawsuit is ever filed. Because the use of the word “compromise” was not limited to a judicially approved, sanctioned, or ordered compromise, there was no basis for limiting compromises to the sphere of civil litigation.

Finally, the excess/umbrella policy contained the word “claims” in addition to the word “suits” in the ultimate net loss provision. Embracing the Foster-Gardner distinction between a suit and a claim -- “[a] ‘claim’ is not a ‘suit’2 -- the Powerine II court necessarily found that the use of the word “claim” in the excess/umbrella policy was designed to encompass administrative proceedings.

Based on the policy language, the Powerine II court concluded that

“the straightforward and unambiguous meaning of the coverage provision here, with its attendant reference to ultimate net loss, interpreted in its ordinary and popular sense, expressly extends coverage beyond “damages” resulting from a lawsuit to embrace also those costs incurred in responding to administrative-agency orders requiring response, cleanup, and abatement of environmental pollution imposed outside the context of a

1 As support for this interpretation, the Powerine II court relied on the holding in Powerine I, wherein the Supreme Court determined that “expenses” referred to costs “required by an administrative agency pursuant to an environmental statute.” Powerine I, 24 Cal. 4th at 966.

2 Specifically, the Foster-Gardner court held that a “claim” could be “the document used to initiate a wide variety of administrative proceedings.” Foster-Gardner, 18 Cal. 4th at 879. lawsuit. The policies commit Central National to indemnify for “expenses” and “damages,” which arise in the context of “adjudication” or “compromise,” and as “claims” and “suits,” all of which have distinct meanings, and are not limited to money ordered by a court in a lawsuit. The care these policies took to list all of these different kinds of costs “indicates that the insurers’ differing rights and obligations with respect to ‘suits’ and ‘claims’ [as well as “expenses” and “damages”] were deliberately and intentionally articulated in the policies. [Citation.]” Where cleanup and abatement costs are incurred “because of” “property damage,” they are thus covered occurrences under the policies. The purposeful inclusion of both the words “expenses” and “claims” indicates the discernible intent that the insurer be responsible in addition to the costs ordered by a court, for the costs incurred in responding to environmental orders initiated by administrative agencies.”

Powerine II, Slip Op. at 21-22 (citations omitted).

In so ruling, the Powerine II Court rejected several arguments proffered by Central National:

g Central National’s argument that the ultimate net loss provisions only purpose was to “burn limits,” but not to define coverage. The Powerine II court found that the ultimate net loss clause specifically was utilized by the insuring provision to “more fully define coverage.” Powerine II, Slip Op. at 22;

g Central National’s argument that its policy follows form to the underlying standard CGL policy. The Powerine II court found that an umbrella policy, by its very nature, grants broader coverage than that provided by primary insurance. Powerine II, Powerine II, Slip Op. at 23-24; g Central National’s argument that its policies were “materially identical” to the standard CGL policy. The Powerine II court found that the only way to agree with this position “would require us to ignore wholesale phrases extant in these policies” contrary to well established rules of policy interpretation. Powerine II, Powerine II, Slip Op. at 24-26; g Central National’s argument that its loss payable provision, which conditions payment under the policy, evidences an intent only to cover damages in a civil action. The Powerine II court found that the loss payable provision was not designed to limit coverage in the manner advocated by Central National, but merely was a condition to coverage. Powerine II, Slip Op. at 26-27; g Central National’s argument that the Foster-Gardner syllogism applied to the excess/umbrella policies. The Powerine II court rejected this argument for the simple fact that the indemnity provisions in the excess/umbrella policies was broader than the policies at issue in Foster-Gardner. Powerine II, Slip Op. at 28- 29; g Central National’s argument that the court should add “no-action” and “voluntary payments” provisions into the policy. Without analyzing what impact, if any, the addition of these provisions would have on the court’s analysis, the Powerine II court refused to rewrite the policies. Powerine II, Slip Op. at 29-30; g Central National’s argument that the “cooperation and assistance” substitutes for a “no-action” provision. The Powerine II court found that the option to associate in the defense or control of any claim did not support the insurer’s position that administrative actions were not covered under the policies. Powerine II, Slip Op. at 30. Conclusion

It is a foregone conclusion that Central National will appeal this decision to the California Supreme Court, and will argue that the decision is inconsistent with Foster-Gardner and Powerine I. The Powerine II court, however, repeatedly demonstrated that its holding was consistent and, in fact, mandated, by the holdings in Foster-Gardner and Powerine I. More importantly, the Powerine II court made clear that its ruling was mandated by the express terms of the excess/umbrella policies. Assuming the California Supreme Court remains faithful to the interpretative principles it articulated and applied in Foster-Gardner and Powerine I, the decision in Powerine II should withstand Supreme Court review should that Court agree to review the Court of Appeal’s decision.

In the meantime, the Powerine II decision represents a significant victory for California policyholders seeking to resolve environmental liabilities without forcing administrative authorities to resort to litigation. Since Powerine I renders such administrative claims uncovered by standard primary policies, it is likely that Powerine II umbrella policies will fill the coverage gaps left by nonresponsive primary policies and, once the policyholder has satisfied a modest “self insured retention,” respond as if they themselves were “primary” policies:

“An umbrella policy may provide broader coverage than the underlying insurance; i.e. umbrella coverage may ‘fill any gaps in coverage left open by the primary coverage . . . . An umbrella policy thus may provide ‘primary coverage’ . . . for claims not covered under the underlying policy or policies.”

Croskey et al., Cal. Prac. Guide: Insurance Litigation (The Rutter Group 2000) ¶ 8:84.