Supreme Court Decides Powerine Oil Co. v. Superior Court (Powerine II) And County Of San Diego v. Ace Property & Cas. Ins. Co.09.01.2005
On August 29, 2005, the Supreme Court issued its opinions in the Powerine Oil Co., Inc. v. Superior Court of Los Angeles (Powerine II) and County of San Diego v. ACE Property & Cas. Ins. Co. cases addressing the question: do excess and umbrella policies afford indemnity coverage for expenses incurred in responding to administrative agency orders? As the reader may recall, the Supreme Court in Foster-Gardner, Inc. v. National Union Fire Ins. Co., 18 Cal.4th 857 (1998) and Certain Underwriters at Lloyd's of London v. Superior Court (Powerine Oil Co.) (Powerine I), 24 Cal.4th 945 (2001) held that under the wording of a "standard comprehensive general liability insurance policy", the insurer's duty to defend and/or to indemnify does not extend to environmental clean-up costs ordered by an administrative agency. The duty to defend and indemnify arise only where there was a civil action, prosecuted in court, initiated by the filing of a complaint seeking damages.
In Powerine II, however, the Court held that an umbrella policy using differing language than that in the "standard" primary comprehensive general liability policy, provided indemnification for settlement and investigation of claims, in addition to indemnification for damages ordered by a court in a suit. Importantly, the Supreme Court relied upon the specific "umbrella" wording of the Central National Ins. Co. of Omaha policies at issue in Powerine II.
In Powerine II, the Supreme Court held that the insuring clause of the Central National excess/umbrella policies in conjunction with its definition of Ultimate Net Loss mandated the conclusion that the umbrella policy provisions provide broader coverage than that provided in the standard primary policy. The Court held that the use of the terms "damages" and "expenses" extended the indemnification obligation beyond "money ordered by a court" (which the Supreme Court in Powerine I had previously defined as "damages"). The Court stressed that the use of both terms meant that they were not synonymous and that an insured could have an 'objectively reasonable expectation" that these policies would afford coverage for expenses involved in the clean-up of a contaminated site required by an administrative agency. Further, the Court held that the use of the terms "compromise" or "settlement, adjustment and investigation of claims" provided broader coverage than that related solely to an underlying court suit. Therefore, based upon the "literal reading of Central National's excess/umbrella policies", the Supreme Court held that the indemnification obligation included expenses incurred in responding to government agency orders imposed outside the context of a lawsuit.
In its ruling, the Court also addressed and rejected a number of arguments made by Central National including: (1) The policies were intended to operate solely as excess insurance; (2) Interpreting the provision to afford coverage for expenses of a compromise or settlement would render the "damages" limitation in the policy as redundant; (3) Interpreting the language to provide coverage for "expenses" of a compromise or a settlement would violate the "assistance and cooperation" clause and result in the insured being able to settle without Central National's consent; (4) The "Loss Payable" provision requires that the court find an indemnity obligation only for a settlement reached with the insurer's consent; and, (5) The term "expenses" contained within the Insuring Agreement should have been referred only to the expenses of litigation in a court suit and not to the expenses incurred in connection with the settlement of a claim.
In County of San Diego v. ACE Property & Cas. Co., the Supreme Court came to a contrary conclusion than that reached in Powerine II as to the obligation of ACE Property & Cas. Ins. Co. under its "non-standard 'excess' third-party liability policy." In that second opinion, the Supreme Court held that ACE's policy obligation to pay for "damages" limited the indemnification obligation to court-ordered money judgments, following the reasoning of similar language addressed in Powerine I. Interestingly, the decision in Powerine II was a unanimous 6-0 determination in favor of the insured. However, in County of San Diego, three of the justices (Baxter, George and Chin) formed the majority opinion. Justice Werdegar, Justice Moreno and Justice Kennard all concurred (at least in part) based upon and in accordance with Powerine I and Foster-Gardner, but all three indicated concern about the "soundness" of those decisions.
In County of San Diego, the Supreme Court rejected the County's argument that the "Ultimate Net Loss" language in the ACE policy also expanded the coverage obligation because, unlike in Powerine II, the term "Ultimate Net Loss" was not incorporated into the insuring provision of the ACE policy (instead, it limited the indemnity obligation to "damages"). Further, the Supreme Court held that the Powerine II policies more fully defined the indemnity obligation through incorporation of the Ultimate Net Loss provision, which was not done in the ACE policy. Instead, the Supreme Court held that the "Ultimate Net Loss" language was only used in the limits of liability provision, "the main function of which appears to be the setting forth of limits of excess liability coverage and was used to define the insured's total loss which would count toward the exhaustion of the underlying self-insured retention."
Finally, the Supreme Court acknowledged that, unlike the Powerine II policies, the ACE policy contained a "no action" clause and a voluntary payment provision clause, both of which make clear that the insurer has the right to control the defense and settlement of any claim. The Supreme Court, therefore, held that the language of the ACE policies was not susceptible of the same interpretation given to the policies in Powerine II and thus that the policy's indemnification obligation did not include costs and expenses associated with responding to administrative orders or to settlements negotiated with claimants outside the context of a suit.
These rulings do not come as a surprise, as they are consistent with the reports received from the hearing after the oral argument. But, we do not expect these cases to be the end of the argument. If the policyholder bar can find the right case to take to the Supreme Court to allow reconsideration of Powerine I and Foster-Gardner, it appears that there are Justices who will urge acceptance of a petition for review and who may lobby for reversal of those cases. The outcome of that will depend, in large part, on the makeup of the Court and, of course, the specific policy language at issue. If we learn of such a case pending before the Court of Appeal, we will monitor its progress through the courts and report again.