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Court holds that insurer has duty to defend in Rev 973 case

Paladin Law Group and one its clients had a victory recently: the U.S. District Court for the Central District of California held that Wilshire Insurance Company has a duty to defend its insured in a lawsuit entitled, Rev 973, LLC v. Mouren-Laurens et al., CV 98-10690-DSF (Ex), alleging liability against thousands of potentially responsible parties for environmental contamination.  Wilshire had argued that there could be no potential for coverage and thus no duty to defend its insured because the claims asserted against him do not allege an “accident” as required by the policies and are excluded from coverage by the qualified pollution and the handling of property exclusions contained in the policies.  The court rejected these arguments.

Factual Background

During the 1980s and 1990s, the insured operated a trucking company that transported used oil from automobiles and disposed of it at waste facilities.  In 1998, an owner of property adjacent to one of those facilities filed a lawsuit against hundreds of defendants, alleging that each defendant jointly contributed to contamination on its property.  The lawsuit has been ongoing for the past two decades and now includes roughly 10,000 potentially responsible parties, facing a potential $50 million clean-up bill plus a $20 million bill for costs incurred to date.

The plaintiff in the Rev 973 case added Paladin’s client as one of those defendants in 2014 alleging that the trucking company disposed of used automobile oil at a hazardous waste facility adjacent to its property, and that the discarded oil then contaminated the soil and groundwater at the facility and migrated off-site, spreading the contamination to its property.  The underlying complaint asserts claims against hundreds of defendants and alleges “disposal” of oil, which it defines as “discharge, deposit, injection, dumping, spilling, leaking, or placing of any solid waste or hazardous waste . . . .”  The complaint also claims that the defendants contributed to the contamination through “purchasing, receiving, handling, using, generating, storing, processing, treating, transporting, disposing of, and/or releasing hazardous substances” on the subject properties.  In sum, the complaint alleges that the oil disposal became part of a commingled plume of contamination, for which all defendants are jointly and severally liable.

Wilshire Insurance Company had issued commercial auto liability policies from 1983–1986.  After initially refusing to defend, Wilshire decided to defend under a “full” reservation of its rights, specifically, the rights “to contend that all or any part of any settlement, judgment, loss, damage or cost of defense is not within the terms, conditions and provisions of the referenced insurance policies,” “to withdraw from the defense; to allocate legal fees between covered and uncovered allegations,” “to recover from the insured any legal fees, court costs, litigation expenses, or indemnity payments (i.e., payments made towards a settlement or satisfaction of a judgment) for which Wilshire had no duty or obligation to pay,” and “to institute litigation to obtain a declaration of its rights and duties.”

Wilshire also stated its intention to retain an attorney of its own choosing to defend the suit.  The insured then requested that Paladin stay on as his Cumis counsel, i.e., independent counsel who represents and is chosen by the insured, but paid for by the insurer because of a conflict of interest between the insured and the insurer.  Wilshire rejected this request, and proceeded to appoint its own panel counsel.

Later, Wilshire supplemented its initial “full” reservation of rights by reserving its right to assert the “qualified pollution exclusion” in the policies.

Procedural History

With Wilshire continuing to insist that Paladin substitute out as counsel in the Rev 973 case and refusing to pay invoices for defense costs, we filed a declaratory relief action, Edwards v. Wilshire Ins. Co., No. CV 15-00793-RGK (SSx).  The complaint seeks a declaration from the court that Wilshire is obligated to pay for Cumis counsel to defend the underlying action.  Wilshire filed an answer and counterclaim, denying that it has any such duty, and seeking a declaration that it has no such duty and has no duty to defend or indemnify.

The Court’s Ruling

The court denied Wilshire’s motion on November 13, 2015.  Wilshire had argued, first, that there could be no potential for coverage and thus no duty to defend because the claims asserted do not allege an “accident” as required by the policies.  Wilshire argued that the insured intended all of the acts resulting in the contamination—he volitionally retrieved the oil and transported and dispose of it at the waste facility as a regular part of his business—and thus there was no possibility of an “unexpected or unintended” (accidental) discharge and thus no possibility of coverage.  The court, however, held that the allegation that defendants are responsible for “spilling” or “leaking” leaves open the possibility that the insured could be liable for unexpected or unintended acts, rendering the alleged conduct an “accident” within the scope of the policies, thus giving rise to a potential for coverage and triggering the duty to defend.

Wilshire also argued that the claims were excluded from coverage by the qualified pollution exclusion, which excludes coverage for damage caused by the discharge of pollution unless the discharge was “sudden and accidental.”  Wilshire argued that the insured’s disposal of used oil at the hazardous waste facility was intentional, not a “sudden and accidental” discharge.  The court rejected this argument, too, noting that the underlying complaint does not specify whether the insured acted negligently or intentionally, and with such scant facts as to his alleged liability, a “sudden and accidental” discharge was conceivable.

Next, Wilshire asserted that were was no coverage under the handling of property exclusion, which excludes coverage for “damage resulting from the handling of property . . . after it is moved from the covered auto to the place where it is finally delivered by the insured.”  Wilshire argued that any contamination must have occurred after the insured deposited the used oil at the hazardous waste facility.  The court also rejected this argument, noting that the underlying complaint alleges that the defendants contributed to the contamination through “purchasing, receiving, handling, using, generating, storing, processing, treating, transporting, disposing of, and/or releasing hazardous substances” on the subject properties. The allegations do not foreclose the possibility that the insured contaminated the property while “handling,” “transporting,” or “disposing of” the used oil, which could occur during unloading—not necessarily after the oil has already been “moved from the covered auto to the place where it is finally delivered.”

The court thus held that Wilshire has a duty to defend Mr. Edwards in the underlying action.

With respect to the issue of Wilshire’s duty to indemnify, the court noted that such duty only arises after a judgment is entered against the insured, which has not yet happened.  The court thus held that the issue of Wilshire’s duty to indemnify was not yet ripe.

And, finally, with respect to Wilshire’s duty to provide Cumis counsel, the court held that Wilshire had failed to meet its burden to show that the issues presented by its reservation of rights differed from or were extrinsic to those issues that were developing or had developed in the underlying action, and that it could not impact coverage by the manner in which it defended the underlying action.

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