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Administrative Adjudicative Proceeding Deemed “Suit” Where That Term Was Not Defined In The Policy

12.01.2010

The Holding

The Supreme Court in Foster-Gardner, Inc. v. National Union Fire Ins. Co., 18 Cal.4th 857, 887 (1998), interpreted the term “suit” in a commercial general liability (“CGL”) insurance policy to mean “a court proceeding initiated by the filing of a complaint.”

On November 18, 2010, the Supreme Court in Ameron Int’l Corp. v. Insurance Company of the State of Pennsylvania et al., 2010 Wl 4643779, held that a federal administrative adjudicative proceeding before an administrative law judge of the United States Department of Interior Board of Contract Appeals (“IBCA”), which involved 22 days of trial, numerous witnesses, and substantial evidence, was a “suit” for purposes of the duty to defend and potential insurance coverage under those policies that did not define the term “suit.”

In so holding, the Court moved away from the “bright-line rule” that it set forth in Foster-Gardner. Although the Court expressly stated that “[the Foster-Gardner] rule will continue to apply to actions involving pollution remediation orders, or any matters that involve threats to take legal action only, rather than to ‘suits,’” the Court determined that the administrative adjudicative action in the IBCA was sufficiently akin to a lawsuit filed in court to qualify as a “suit,” as a reasonable insured would understand that term. Importantly, although concurring, Justice Kennard expressly stated that she would have preferred to overrule Foster-Gardner.

Factual Background

Peter Kiewit Sons’ Company (“Kiewit”) was general contractor for a U.S. Department of the Bureau of Reclamation (“Bureau”) aqueduct project. Kiewit subcontracted manufacture of siphons for the project to Ameron International Corporation under a contract requiring Ameron to defend and indemnify Kiewit in the event the siphons proved defective. Kiewit was also an insured under Ameron’s insurance policies.  Ameron had primary and excess/umbrella liability policies from 11 insurers between 1978 and 1995. 

In 1992, the Central Arizona Water Conservation District filed a lawsuit against Ameron in federal district court after discovering defects in the siphons. Ameron gave notice of that suit to the insurers. The suit was later dismissed and was not the subject of a coverage dispute.

In 1995, the Bureau’s contract officer issued decisions finding Kiewit liable for the siphon defects and sought damages from Kiewit and Ameron. Under their indemnity agreement providing for a private contractual remedy, Kiewit and Ameron challenged the Bureau’s decision before the IBCA. After a 22-day proceeding before the IBCA, Ameron and Kiewit settled the Bureau’s claims for $10 million. After settlement, most of Ameron’s insurers failed or refused to pay for defense or indemnification costs.

Ameron then sued its insurers for breach of contract, bad faith, declaratory relief, waiver and estoppel, and contribution. The superior court, relying on Foster-Gardner, ruled in favor of the insurers and dismissed Ameron’s suit. The Court of Appeal partially reversed. It found that policies that defined “suit” as a “civil proceeding” afforded coverage for the administrative proceeding and the settlement while policies that contained no definition (as in Foster-Gardner) of “suit” did not afford coverage. The Supreme Court reversed, deciding in favor of Ameron and against the insurers.

Analysis

Ameron argued that under the Contract Disputes Act of 1978 (“Contract Disputes Act”), 41 U.S.C. § 601 et seq., it could have chosen to challenge the decision of the Bureau’s contracting officer either by appealing that decision to the IBCA or by bringing an action in the United States Court of Federal Claims. Ameron asserted that the IBCA proceedings are “civil proceedings,” in which the IBCA acts in a “judicial capacity” when conducting hearings and deciding contested factual issues. Ameron contended that the Contract Disputes Act refers to an action filed in either the IBCA or the Federal Claims Court as a “suit.” Ameron contended that the IBCA proceedings thus qualified as a “suit” under the policies, giving rise to a duty to defend. Ameron argued that Foster-Gardner did not apply to the IBCA “civil proceedings,” or if it did, the Supreme Court should overrule it to hold that IBCA proceedings are considered the trial of a “suit.”

The insurers generally argued that the Foster-Gardner rule applied because the IBCA is not a “court of law,” so any hearing before it was not the trial of a “suit” unless specifically indicated as such in a policy.

In Foster-Gardner, the Supreme Court had set a “bright-line rule” (extended in Certain Underwriters at Lloyd’s of London v. Superior Court, 24 Cal.4th 945, 960-961 (2001) (“Powerine I”), that a “suit” in the standard CGL policy, without further definition, required a proceeding brought in a court of law by the filing of a complaint. In Ameron, the Supreme Court reviewed the line of cases following Foster-Gardner and Powerine I, in which Foster-Gardner’s “literal approach” was applied. The Court was careful to explain that Ameron’s Petition for Review presented the “narrow but fundamental question whether an adjudicative administrative action like the IBCA action is a ‘suit’ for purposes of coverage under a liability policy,” which the Court found to be an issue of first impression.

As the Court then explained, it had to “decide if the concerns that led us to conclude that issuance of a pollution remediation order [in Foster-Gardner] was not a ‘suit’ also apply to hearings before a federal administrative adjudicative body.” To do this, the Court compared the IBCA’s complaint requirements to those of the California Code of Civil Procedure, examined Congress’ intent in establishing the IBCA, and examined the structure of IBCA proceedings.

First, the Court explained that the purpose of requiring a complaint in Foster-Gardner was to give insurers “notice of the parameters of the action against the insured.” The Court found that requirement was met here, as the IBCA requires the appellant contractor to file a complaint  “setting forth simple, concise, and direct statements of each claim, alleging the basis with appropriate reference to contract provisions for each claim. . . .”  The Court said this level of specificity gave as much, if not more, notice to insurers than the Code of Civil Procedure.  Furthermore, the Code of Federal Regulations requires that an IBCA pleading “fulfill the generally recognized requirements of a complaint.”

Second, in concluding that the administrative proceeding was a “suit,” the Court rejected the insurers’ arguments that Ameron had given up any due process rights by choosing to file its appeal in the IBCA rather than in an Article III court or in the Federal Claims Court. The Court looked to a Senate Report regarding the IBCA and remarked that Congress expected that such agency boards would handle more than 90 percent of contract claims and that due process rights are adequately protected in the IBCA quasi-judicial proceeding.

Third, the Court found that Ameron had a reasonable expectation of coverage, as a reasonable policyholder would recognize the IBCA proceedings, in which witnesses testified and were cross-examined, as a suit. As for the structure of IBCA proceedings, the Court found it notable that parties may subpoena witnesses and introduce evidence and that all evidence is subject to generally accepted federal rules of admissibility. The Court held that parties to a liability insurance policy that does not define the term “suit” should expect a federal adjudicative administrative agency board proceeding to trigger defense and indemnity coverage and that “[i]t is safe to assume that Ameron would not have proceeded under the IBCA appeals process if it had known that coverage would not be extended to its $10 million settlement with the government.”

The Court expressly rejected the insurers’ argument that because a contractor could choose to proceed through the Federal Claims Courts, rather than the IBCA, Congress intended to distinguish an IBCA proceeding from a “suit” and that the lower standards of due process in the IBCA proceedings required a distinction be made. The Court also dismissed the insurers’ argument that use of the term “suit” in the Contract Disputes Act was simply an error. The Court noted that Congress redrafted the relevant section when it enacted the Act and declined “to find that a typographical error appears in the legislation.”

The Court noted that Foster-Gardner would continue to apply to “actions involving pollution remediation orders, or any matters that involve threats to take legal action only, rather than to ‘suit.’” The Supreme Court held that the “[IBCA] proceeding was not a ‘threat’ to take legal action; it was an administrative adjudicative action” and thus required “ a departure from Foster-Gardner’s rule.”


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