In 1998, in Foster-Gardner v. National Union Insurance Co., 18 Cal.4th 857 (1998) the California Supreme Court drew a distinction between a "claim" and a "suit." The court held that "suit" means lawsuit and that the duty to defend did not apply to administrative proceedings in which the insured is a potentially responsible party for environmental pollution. The Court did not reach the issue of whether there was a duty to indemnify for administrative actions.
In 2001, the Court held in Certain Underwriters at Lloyd's of London v. Superior Court, 24 Cal.4th 945 (2000) (Powerine I) that a primary commercial general liability insurer does not have a duty to indemnify for the costs of compliance with coercive administrative orders. The key to Powerine I was the ruling that such costs are not "damages" under CGL policies.
In 2002, after Powerine I was decided, Central National Insurance Company moved for summary adjudication seeking an order that, pursuant to Powerine I, it had no duty to indemnify the insured under its excess/umbrella policies for any sums spent by the insured pursuant to various clean-up and abatement orders because no "damages" within the meaning of those policies had been ordered by a court. Pursuant to Powerine I, the trial court granted the motion. Powerine filed a petition for writ of mandate which was granted by the Court of Appeal ("Powerine II").
In December 2002, the Court of Appeal reversed. The Powerine II court distinguished the Central National policies from the policies involved in the Foster-Gardner and Powerine I cases because the Central National policies were excess/umbrella policies and not the primary CGL policies in issue in Foster-Gardner and Powerine I.
The insuring agreement of the Central National policies provides:
"The Company hereby agrees . . . to indemnify the Insured for all sums which the Insured shall be obligated to pay by reason of the liability . . . imposed upon the Insured by law . . . for damages . . . and expenses, all as more fully defined by the term "ultimate net loss" on account of . . . property damage . . . caused by or arising out of each occurrence."
"Ultimate net loss" is defined as "the total sum which the Insured, or any company, as his insurer, or both, become obligated to pay by reason of property damage . . . either through adjudication or compromise, and shall also include . . . all costs . . . for litigation, settlement, adjustment and investigation of claims and suits, which are paid as a consequence of any occurrence hereunder. (Emphasis added)
The court stated that, unlike the general liability policies at issue in Powerine I, the coverage provision in the Central National policies "does not leave the word 'damages' alone, but adds the term 'expenses.' 'The use of the term raises the inference that they were not intended to be synonymous.'" Powerine II, supra, 123 Cal.Rptr.2d at 836. The court went on to state the inclusion of the word "expenses" in the coverage provision 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." Id.
The court next examined the definition of "ultimate net loss" which, under the coverage provision, further defines the terms "damages" and "expenses." The court stated that the use of the term "adjudication" in the ultimate net loss provision, "implies a proceeding in a court," while the term "compromise" "does not necessarily implicate a suit commenced by filing a complaint. A compromise may be reached before a complaint is ever filed." Id. Finally, the court pointed out that the ultimate net loss provision "employs both the terms 'suits' and the word 'claims,'" and the court stated that "a 'claim' is not a 'suit.'" Id. at 837.
Based on these principles, the Court of Appeal held the Central National policies, with their reference to ultimate net loss, extend coverage beyond "damages" resulting from a lawsuit to encompass also those costs incurred in responding to administrative-agency orders. The court concluded that the policies required Central National to provide indemnity for such costs because they fall within the ambit of "damages and expenses" that arise in the context of the "adjudication or compromise" of "claims and suits" Id. at 838-39.
During oral argument, the Supreme Court focused on the phrase "investigation of claims and suits" in the definition of ultimate net loss and the inclusion of the term "expenses" in addition to the term "damages." Questions from the Justices zeroed in on distinctions among the terms "claims," "suits," "damages," and "expenses" in the Central National policy. The Court suggested that the use of those terms in the policies was not duplicative and the terms were not intended to be synonymous. In response, Central National argued that the Court of Appeal, in its decision, omitted the dispositive phrase "shall also include" from the ultimate net loss provision, which operates to limit coverage under the policies to "expenses." Central National argued that "expenses" should be interpreted as "costs of defending a claim for damages" and should not be expanded to include costs incurred to defend or investigate an administrative claim.
As for the inclusion of the phrase "investigation of claims and suits" in the ultimate net loss provision, Central National explained that the clause defines the limits of liability and that, as a business decision, the insurer may choose to investigate and compromise a claim before a lawsuit has been filed. In this circumstance, according to Central National, the phrase "investigation of claims and suits" is used to insure that any payment made in settlement of a claim erodes the insured's limits. Several Justices, including Justice Kennard and Justice Baxter, did not appear persuaded by Central National's argument that the inclusion of the words "expenses" and "claims" could be interpreted to limit coverage under the policies.
In response to Central National's arguments and the Court's comments, Powerine noted that in the Foster-Gardner ruling, the Court held that there was a material difference between "claims" and "suits." Powerine's counsel argued that, based on Foster-Gardner, any reasonable insured who read the ultimate net loss provision in the policies in this case would conclude that there is a difference between these two words and further conclude that coverage under the policies include cleanup and abatement costs. Justice Kennard, who appeared to be leaning in favor of the insured, asked Powerine about the phrase "shall also include" and whether it should be interpreted to limit coverage, as Central National suggested, or to expand coverage. Powerine naturally answered that the phrase expands coverage because any reasonable insured would not have thought that "expenses" was limited to defense costs nor would a reasonable insured interpret "claims" and "suits" as synonymous, particularly in light of the Court's decision in Foster-Gardner.
While it is speculative to predict a ruling based on the Justices' questions, it appears that at least two of the Justices are leaning in favor of the insured in the Powerine II matter. This suggests that, depending upon the policy language, some excess and umbrella insurers may have indemnity obligations for pollution costs that primary insurers may avoid.