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INSURANCE NOTES

Costs To Settle Suits Without A Judgment Were Not "Damages" Subject To Indemnity Under Liability Policies, But A Stipulated Judgment Might Be

10.25.2007

In Aerojet-General Corp. v. Commercial Union Ins. Co., et al., 65 Cal.Rptr.3d 803 (2007), the Court of Appeal held that a settlement of environmental pollution litigation were not sums the insured became "legally obligated to pay . . . as damages" because they were not ordered by a court. Thus, the excess liability insurers in this case had no liability to indemnify for the settlement.

Several water entities sued Aerojet for groundwater contamination. Aerojet notified its primary and excess insurers. No excess insurers accepted the tender. Aerojet settled the suits for $175 million, which exceeded the total amount of its primary and excess insurance. The excess insurers refused to indemnify for any of the settlement.

The Court agreed with the insurers' position. The Aerojet decision was a natural extension of the California Supreme Court's decision in Certain Underwriters at Lloyd's of London v. Superior Court, 24 Cal. 4th 945, 960 (2001) ("Powerine I"), that costs incurred in compliance with an administrative order to clean up environmental contamination were not "damages" as they were not ordered by a court. The Aerojet decision also followed County of San Diego v. Ace Property & Casualty Ins. Co., 37 Cal.4th 406, 416-417 (2005), which held there was no duty to indemnify the insured for the costs of settling a claim for environmental pollution outside the context of a lawsuit, as no money was ordered by a court.

The Aerojet case presented the "next question," i.e., whether settlement costs negotiated within the context of a court suit were "damages." The Court answered in the negative.

The Court noted the settlement agreement was negotiated and agreed to by Aerojet and the water entities and that there was no evidence they sought to have the settlement agreement entered as a judgment in the suits. Instead, there were stipulations and orders for dismissal without prejudice. Nothing in the record indicated the court ordered Aerojet to pay any sum of money. Accordingly, the Court concluded, the settlement costs were not "damages" within the meaning of the policies.

The Court further suggested that any court order or judgment requiring the payment of money might be covered by the indemnity language under a standard liability policy, whether "expressly ordered by the court as damages in a final judgment," "expenses that arise from complying with an injunction," or "interim orders or awards of costs and attorneys fees."

The Court clearly signaled to Aerojet that it may need only to go through the procedural step of having the settlement agreement entered as a judgment to satisfy the policies' requirement of "damages" ordered by a court and obtain indemnification for the large settlement costs.

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