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INSURANCE NOTES

Supreme Court Makes "Sudden and Accidental" Pollution Exclusion Harder To Apply

03.16.2009
On March 9, 2009, the California Supreme Court issued its much-anticipated opinion in State of California v. Allstate, 2009 WL 579415. The opinion substantially alters California law, making it harder for insurers to apply the “sudden and accidental” pollution exclusion.
The Supreme Court held that the relevant discharge of pollutants for purposes of determining whether a discharge was “sudden and accidental” was not the initial deposit of waste into the ponds, but the later release of pollutants from the ponds. The Court further held that the insured did not have the burden to allocate between “covered” and “uncovered” damage in order to obtain indemnity, disapproving Golden Eagle Refinery Co. v. Associated Int’l Ins. Co., 85 Cal.App.4th 1300 (2001) and Lockheed Corp. v. Continental Ins. Co., 134 Cal.App.4th 187 (2005).
Starting in 1956 and over a 16-year period, more than 30 million gallons of liquid waste were deposited at the “Stringfellow” site, a Class I hazardous waste site in Riverside County, California. The State of California (the insured) was involved in the design and operation of the site and was found responsible in an underlying suit for cleaning up the massive contamination. The State sued its insurers seeking indemnity.
Although it was undisputed that underground leaks occurred at the site, the State identified two allegedly “sudden and accidental” discharges. First, in 1969, heavy rains flooded the site and caused the ponds to overflow and send polluted water down Pyrite Creek. Second, in 1978, another heavy rainfall nearly overflowed the ponds, the retention dam began to fail, and the State conducted controlled discharges from the ponds, releasing diluted waste down Pyrite Creek.
The insurers sought summary judgment, asserting (among other things) that indemnity was barred by the pollution exclusion, which excluded coverage for “Personal Injury or Property Damage arising out of the discharge, dispersal, release, or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land or the atmosphere but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.” [Emphasis added.] 
The insurers argued that the focus of the pollution exclusion is on the initial discharge (i.e., the deposits of waste into the ponds), not the release of waste from the ponds (i.e., the 1969 and 1978 discharges), and that under California law, the deposit of waste at the site is not “sudden and accidental” as a matter of law. The insurers argued that even if the later discharges were to be considered, the exclusion still applied to bar coverage because: (1) the 1969 and 1978 discharges were neither “sudden” nor “accidental”; (2) the State could not meet its burden of identifying and quantifying the damage resulting from the alleged sudden and accidental discharges as opposed to damage resulting from the uncovered events; and/or (3) an “absolute” “watercourse exclusion” applied.

After the trial court granted summary judgment in favor of the insurers, the State appealed. The Court of Appeal reversed on almost all grounds. Then, the Supreme Court decided all issues in favor of the State. 
The Supreme Court stated that when determining whether property damage falls within the “sudden and accidental” exception to the pollution exclusion, “the focus of the analysis must be on the particular discharge or discharges that gave rise to that property damage.” The Court further reasoned:
Here the State's liability was based on its having sited, designed, built, and operated the Stringfellow facility in such a negligent manner as to allow hazardous chemicals to escape from the evaporation ponds (by both seepage and overflow) into the surrounding environment. The State was not held liable for polluting the evaporation ponds, but for polluting the land and groundwater outside the ponds. The relevant discharges for application of the pollution exclusion, then, are those in which, due to the State's negligence, pollutants were released from the Stringfellow evaporation ponds into the surrounding soils and groundwater.
The Supreme Court distinguished Standun, Inc. v. Fireman’s Fund Ins. Co., 62 Cal.App.4th 882 (1998) (in which the appellate court held that the focus was on the deliberate dumping into the landfill), stating that the insured’s liability in Standun was based upon the initial disposal of waste. The Court further stated that in Standun, pollutants were deposited directly onto the land or into the water “without any attempt at containment,” while the wastes at issue here were placed “into containment in the evaporation ponds.”1 Citing its opinion in MacKinnon v. Truck Ins. Exch., 31 Cal.4th 635 (2003), the Court reasoned that the initial deposit of waste here was not itself a “discharge, dispersal, release or escape” within the meaning of the pollution exclusion because “’[a] reasonable insured would not understand an exclusion for ‘release’ of pollutants to apply where, as here, the wastes are deposited into intended containment ponds and do not behave as environmental pollutants until they are later released or discharged from the ponds.”
In sum, the Court concluded that “the initial deposit of wastes was not a polluting event subject to the policy exclusion (i.e., a “discharge, dispersal, release or escape” of pollutants) and, even if it were, the State's liability was based not on the initial deposit, but instead on the subsequent escape of chemicals from the Stringfellow ponds into the surrounding soils and groundwater, making that the relevant set of polluting events.”
The Court also determined that triable issues of fact existed as to whether the 1978 release was “sudden and accidental.” Although the Court acknowledged that “in one obvious sense the 1978 discharges were not accidental [because] the wastes were intentionally released at [the State’s] direction,” that fact was not determinative because the State “ordered the release only to prevent a larger, uncontrolled discharge of wastes if, as threatened, the dam broke, which the State maintains would have been an accidental discharge.” The Court concluded that “the qualified pollution exclusion does not bar coverage for liability arising from the State’s intentional releases performed to prevent such a greater accidental release.” 
As to the watercourse exclusion, the Court defined a watercourse as a “the channel through which the water of a particular district or watershed usually or periodically flows” and held that the insurers failed to carry their burden to show by undisputed evidence that the 1969 overflow was wholly confined to a watercourse.
The final issue was whether the insured had the burden to allocate the property damage caused by “sudden and accidental” discharges, consistent with Golden Eagle and Lockheed, supra. The Court disapproved of Golden Eagle and Lockheed on the ground that such holdings are inconsistent with its decision in State Farm Mut. Auto Ins. Co. v. Partridge, 10 Cal.3d 94 (1973). In Partridge, the insured was driving his car when a gun, which he had modified to have a “hair trigger,” discharged and hit a passenger. The Partridge Court held that an exclusion for injuries arising out of the use of a motor vehicle did not bar coverage because use of the car was one of two concurrent causes of the accident, and the other concurrent cause (i.e., the insured's modification of the gun) was a risk covered by the policy, for which the insured was liable.
This Court explained that in determining the scope of coverage, the court must look to the rules governing the insured’s underlying liability and traditional concepts of fault, proximate cause and duty. Thus, under Partridge, where the damage is the result of both covered and uncovered events and the damages are indivisible, the insured is liable under tort law for all the damages and the insurer must indemnify the insured for all of the damages if the covered event was a “substantial factor” in causing the damage.
The Court made clear that its holding does not apply to “distinct, divisible injuries or items of property damage.” The Court also emphasized that its holding “does not extend indemnity to situations where the policyholder can do no more than speculate that some polluting events may have occurred suddenly and accidentally, or where sudden and accidental events have contributed only trivially to the property damage from pollution.” Rather, the Court stated that the insured still has the burden to prove that a covered act or event was a “substantial cause of the injury or property damage from which the insured is liable.” However, if the insured makes such a showing, it is not required to also show how much of the indivisible damages resulted from covered causes. Instead, “[t]he insurer may . . . counter the insured's evidence of indivisibility with its own evidence that the damages are divisible and that only a limited portion of them resulted from covered events.” 

In short, the Supreme Court’s opinion makes it more difficult to apply the pollution exclusion in cases where the insured identifies alleged “sudden and accidental” releases. Most significantly, it overturns longstanding appellate case law concerning the relevant discharge for purposes of applying the “sudden and accidental” exception. It also disapproved of established Court of Appeal precedent that placed the burden on the insured to allocate its damages between covered and non-covered claims. Yet, the first hurdles for the insured will remain the same: (1) can the insured show any “sudden and accidental” events; and (2) were those “sudden and accidental” events a “substantial cause” of the damages? If the insured can make that showing, the road to success has become a much steeper climb for insurers. 
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1 There is little to distinguish Standun from this case. In both, pollutants were dumped into unlined ponds, escaped almost immediately and contaminated the surrounding area.

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