Powerine II and County of San Diego v. Ace:
Policies Covering “Expenses” Insure Against Environmental Agency-Ordered Cleanups, but Coverage for “Damages” Alone Requires a Lawsuit

September 02, 2005

Small, seemingly innocuous differences in the language of your company’s comprehensive general liability (CGL) insurance policies can make a dramatic difference in whether coverage is available for major losses.  This was certainly the case with the policies in issue in two recent and long-anticipated decisions by the California Supreme Court in Powerine Oil Co. v. Sup. Ct., -- Cal. 4th --, S1113295 (August 29, 2005) (slip op.) (“Powerine II”) and County of San Diego v. ACE Prop. & Cas. Ins. Co., -- Cal. 4th --, S. 114778 (August 29, 2005) (“San Diego”) (slip op.).

In each case, the insured sought indemnity coverage under its excess/umbrella policies for environmental cleanup and response costs incurred in responding to government-issued cleanup and abatement orders when no lawsuit had been filed to compel such cleanup and abatement.  The California Supreme Court reached opposite coverage conclusions in the two cases based on subtle differences in the language of the policies.

Powerine Oil Co. v. Sup. Ct.
In Powerine II, the California Supreme Court held that indemnity coverage could not be defeated on summary adjudication because the insuring clauses in the nine excess policies at issue expressly covered, among other things, “expenses” and not merely “damages.”  Furthermore, the language of those identical clauses also referred to “ultimate net loss” in defining “expenses,” and the definition of “ultimate net loss” expressly included money the insured was obligated to pay for the “investigation of claims.”  The Court held that this plain language provided coverage for expenses incurred by the insured in responding to government agency orders administratively imposed, even though the government did not file any lawsuit against the insured seeking cleanup and abatement of environmental pollution.

County of San Diego v. ACE Prop. & Cas. Ins. Co.
In contrast, in San Diego, the court found, among other things, that because the insuring agreement only covered "damages," no coverage was provided for government-ordered cleanup costs under the San Diego policy, absent the filing of a lawsuit.  Relying on prior California Supreme Court decisions, the court held that because the policy in question provided coverage only for “damages,” amounts incurred in response to an administrative order, absent a lawsuit, were not covered.  See, e.g., Certain Underwriters at Lloyd’s of London v. Sup. Ct., 24 Cal. 4th 945, 960, 64 (2001)(“Powerine I”); see also Foster-Gardner, Inc. v. Nat’l Union Fire Ins. Co., 18 Cal. 4th 857, 878-88 (1998) (holding that an insurer’s duty to defend its insured in a “suit seeking damages” under standard CGL policy language was limited to a civil action prosecuted in a court).

The San Diego court also reasoned that in the policy at issue, unlike those in Powerine II, the definition of the term “ultimate net loss” only served to define the insured's total loss that would count toward exhaustion of the self-insured retention.  The policy did not incorporate “ultimate net loss” or similar language in the coverage grant itself.

Finally, the San Diego court reasoned that the policy’s “no action” clause further supported the argument that the policy only covered damages recovered in a lawsuit because it provided the carrier could not be sued directly except after the insured's liability had been determined by a judgment against the insured after trial or by written agreement between the insured, the claimant and the carrier.  Since the carrier had not agreed to payment, and no court had entered a judgment against the County of San Diego, the court held the government-ordered costs of cleanup and abatement were not covered.  The excess policies in Powerine II, in contrast, lacked similar “no action” clauses.

Conclusions
The import of these decisions is that small changes in wording—coverage for “expenses” as opposed to coverage for “damages”—can have a significant effect on your company’s ability to obtain insurance coverage for environmental cleanup costs that are incurred in responding to government agency-issued orders.  The losses in both of these cases extended over many years, and therefore implicated multiple policies.  It is important for insureds facing the potential for such liability to identify policies covering as many years as possible, to review carefully the language in all potentially-applicable policies, and to retain experienced coverage and environmental counsel to determine which policies may provide insurance coverage.

For further information on this, or other insurance coverage- or environmental-related legal questions please contact Deborah Ballati, John Green, or Mary McCutcheon in Farella Braun + Martel's Insurance Coverage Group, or John Gregory or Buzz Hines in the Environmental Group.