Grab Your Umbrella -- and Magnifying Glass
By Marc Mayerson | August 30, 2005
For the past two decades, policyholders and insurers have been fighting over whether the cost of cleaning up hazardous-waste sites is covered under general-liability policies by arguing over the nature of that liability. The argument has tended to center on the meaning of the word “damages” and the insuring agreement’s promise to afford indemnification for the sums payable “as damages.”
Departing somewhat from the standard version of these arguments, the California Supreme Court ruled in 2001 that covered “damages” were limited to money ordered by a court. Now, the court has reaffirmed that holding, County of San Diego v. Ace Property & Casualty Insurance Co., 37 Cal. 4th 406 (2005), but in a companion case held that an umbrella policy that afforded coverage for “expenses” in addition to “damages” unambiguously extended to cleanup costs arising from an administrative proceeding. Powerine Oil Co., Inc. v. Superior Court, 37 Cal. 4th 377 (2005). Both decisions were issued on August 29, 2005. The court purports to be implementing the “mutual intent” of the parties, with the result that one insured has coverage under the insuring agreement due to the inclusion of the word “expenses” and the other one does not. The Powerine court left other policy provisions and exclusions for further proceedings.
It is true that the purpose of umbrella policies is to provide broader coverage than the underlying coverage and to drop down or step down and fill in a gap created by a loss that is not covered by the underlying insurance, subject to the terms of the particular policy. We generally conceive of this gap-filling function as ensuring that the policyholder does not fall between two stools, when, for example, neither an auto policy nor a homeowners’ policy applies to some strange loss involving an automobile. Nothing in the language of the umbrella policies at issue limits their coverage to these types of gaps, and the California Supreme Court apparently had no trouble at all concluding that indemnification for expenses naturally includes cleanup costs in state administrative actions, even though the underlying coverage—which indemnifies “only” for “damages”—does not apply. As the Powerine court explained:
We therefore conclude that under a literal reading of Central National’s excess/umbrella policies, the indemnification obligation is expressly extended beyond court-ordered money “damages” to include expenses incurred in responding to government agency orders administratively imposed outside the context of a government lawsuit to cleanup and abate environmental pollution.
But this was not the result for the County of San Diego, because though its policy used the term “expenses” in the “ultimate net loss” definition, the court treated that definition as relevant to the limits of liability rather than as expanding the insuring agreement. The word “expenses” was located in the wrong place as far as the California court was concerned. As the court explained—in italicized language, no less:
In contrast, the definition of “ultimate net loss” here is neither incorporated into, referenced, nor a part of the central insuring clause of the Ace policy.
County of San Diego, slip op. at 14 (emphasis in original). Accordingly, the court holds:
We conclude that costs and expenses associated with responding to administrative orders to clean up and abate soil or groundwater contamination outside the context of a government-initiated lawsuit seeking such remedial relief, and property buy-out settlements negotiated with third party claimants outside the context of a court suit, do not fall within the literal and unambiguous coverage terms of the Ace policy’s insuring agreement.
County of San Diego, slip op. at 16 (emphasis in original). Three of the six participating California Supreme Court justices, however, wrote separately to express disagreement with aspects of the lead opinion’s reasoning or result: Justices Werdegar and Moreno concurred separately, and Justice Kennard concurred and dissented.
Those justices no doubt are right (in my judgment) to question the reasoning that leaves the case law where it stood on August 29, 2005. In some ways, a more rational result would have been to deny coverage to Powerine, too, at least to accomplish some degree of aesthetic consistency (and lest there be any misunderstanding, I think the original ruling by the court in the earlier case limiting coverage to amounts awarded in court was plainly wrong). Now, at least in California, we need to scrutinize policies not just for the word “expenses” but also for its coordinates within the policy.
There is an important, broader implication of this duet of opinions: policyholders need to be vigilant in notifying umbrella carriers (and presumably the following-form tower) whenever some form of unconventional relief, i.e., other than pure compensatory damages, is sought against them, whether it be in a court proceeding or in an administrative proceeding. Accordingly, a claim for medical monitoring, which some insurers have challenged as “non-damages,” should be noticed to the umbrella carriers to guard against the risk that those amounts might be considered to be “expenses” rather than “damages” (no matter how unreasonable that result might be). Similarly, whenever a policyholder is interested in settling with a claimant prior to litigation, the policyholder should notify the umbrella carriers, for any such payment might, under the California authority discussed here, be found not to be covered “damages” either.
Of course, this all will create new burdens on umbrella carriers, who typically rely on the primary insurer for everyday claims handling. But according to the California Supreme Court’s approach in these decisions, we simply must assume the umbrella carrier had the contractual intent to cover claims settled before court proceedings start and forms of monetary relief other than traditional compensatory damages.
Originally published in Insurance Scrawl on August 30, 2005. Republished with updated citation information and editorial revisions. This post is not a comprehensive survey of subsequent law.
Related: Insurance Coverage · Marc Mayerson’s biography.
Topics: Umbrella Insurance · Excess Insurance · Environmental Coverage · Policy Interpretation · California
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