"Ultimate Net Loss" after Powerine - Another Victory for Policyholders
The California Supreme Court recently handed down an important victory for policyholders in Powerine Oil Co., Inc. v. Superior Court (2005) 37 Cal. App. 4th 377 (“Powerine II”). In Powerine II, the Court held that “standard” excess/umbrella liability policies include potential coverage for environmental cleanup and response costs ordered by an administrative agency. While the case is particularly pertinent to companies facing administrative cleanup and abatement orders, it could have significant widespread application to umbrella policyholders facing “long-tail” liability.
Powerine II involved a dispute over coverage for costs incurred by the insured in complying with a California Regional Water Quality Control Board remedial cleanup and abatement order pertaining to soil and groundwater contamination.
Two prior decisions are essential to understanding the California Supreme Court’s analysis of the questions presented in Powerine II: Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal. 4th 857 and Certain Underwriters at Lloyd’s of London v. Superior Court (2001) 24 Cal. 4th 945 (“Powerine I”).
Foster-Gardner addressed the scope of the duty to defend under a standard comprehensive general liability (“CGL”) insurance policy. In Foster-Gardner, the California Supreme Court adopted a “literal” approach to interpreting a “standard” provision imposing on the insurer the duty to defend the insured in a “suit seeking damages.” Foster-Gardner, 18 Cal. 4th at 869. The court held that this provision limited the insurer’s duty to defend to a “civil action prosecuted in a court,” and did not extend to a proceeding conducted before an administrative agency. Id. at 878-888.
Powerine I involved the scope of the duty to indemnify under a standard CGL insurance policy. In Powerine I, the California Supreme Court interpreted a “standard” insuring provision that required the insurer to indemnify the insured for “all sums that the insured becomes legally obligated to pay as damages.” The court held that the insurer’s duty to indemnify under the “standard” CGL insuring provision is limited to “damages,” i.e., “money ordered by a court.” Powerine I, 24 Cal. 4th at 960-964. Therefore, according to the court, the duty to indemnify for “damages” did not extend to “expenses” required by an administrative agency. Id. at 966.
In Powerine II, the California Supreme Court focused its analysis on the “standard” excess/umbrella policy insuring agreement and unanimously held that “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.” Powerine II, 37 Cal. App. 4th 398.
The insuring language in the excess/umbrella policies at issue provided, in relevant part:
“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, direct or consequential 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 happening anywhere in the world.” Id. at 395 (emphasis in original).
The court found that the language was unambiguous and clearly extends beyond money ordered by a court. Unlike the standard CGL policy language considered in Powerine I, the court observed that the insuring clause of the standard excess/umbrella policy provides indemnification coverage for “damages . . . and expenses . . .” The court reasoned that “damages” and “expenses” are not synonymous and found that the addition of the term “expenses” in the insuring clause extends coverage beyond the limitation imposed where the term “damages” is used alone. Use of the term “expenses” thereby enlarges the scope of coverage beyond “money ordered by a court.” Id. at 397. Significantly, the court also ruled that the term “expenses” was not limited to “litigation expenses,” but instead the term “expenses” extended the insurers’ duty to indemnify the insured for expenses to respond to Regional Water Board’s environmental cleanup orders. Id. 404.
Moreover, the court pointed out that the insuring clause further defines the indemnification obligation by reference to the definition of “ultimate net loss,” which in turn includes sums the insured becomes “obligated to pay by reason of . . . property damage . . . either through adjudication or compromise and shall also include . . . all sums paid . . . for litigation, settlement, adjustment and investigation of claims and suits . . .” The court stated that sums the insured becomes legally obligated to pay through “compromise” or the “settlement, adjustment and investigation of claims” do not necessarily reflect an underlying court suit. Id. at 397.
The court concluded: “It follows that where the express insuring language of an excess/umbrella policy broadens indemnity coverage for sums paid in furtherance of a ‘compromise’ or ‘settlement’ of a ‘claim’ initiated by an administrative agency for such remedial relief, the insured’s liability for such expenses falls within the policy’s indemnification obligation even though no government suit was filed.” Id. at 397-398.
Finally, the court noted that the excess/umbrella policies at issue were not merely intended to operate as excess insurance, but rather to also provide umbrella coverage which may serve to “fill gaps” in coverage left open by the underlying primary policy. Therefore, the insured would have expected the policies to grant broader coverage than that provided by the primary insurance. The more expansive reading of the excess/umbrella insuring clause thus gives effect to the mutual intent of the parties. Id. at 399.
Powerine II is significant because it demonstrates that excess/umbrella policies can play an important roll in protecting clients from administrative proceedings even when primary policies provide no such protection. Furthermore, it provides a lever to bring excess/umbrella policies to the settlement table early and, one would like to think, without the necessity of formal litigation. This case once again highlights the importance of historical insurance assets in addressing, cleaning up, investigating, and responding to environmental issues at properties.