By Bret A. Stone and John R. Till
On March 9, 2009, the California Supreme Court delivered a much anticipated decision establishing that in determining coverage for environmental contamination where multiple acts or events have contributed to an indivisible amount of contamination, so long as at least one of the events causing the indivisible harm is a covered event, the insurer must provide coverage for the entire amount. State v. Allstate Ins. Co., Case No. S149988 (Cal. Sup. Ct. March 9, 2009); (2009) 2009 WL 579415.
While the facts of the case are extensive, the basic facts will apply to many situations of environmental contamination. The State and the United States sued companies that had disposed of waste at the Stringfellow Acid Pits, and the companies counterclaimed against the State. The underlying case involved releases of hazardous wastes from evaporation ponds at the site. When the State tendered the matter, the insurers denied coverage. The State then sued the insurers for declaratory relief, breach of contract, and bad faith denial of coverage.
The general liability insurance policies at issue obligated the insurers “[t]o pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay by reason of liability imposed by law” because of property damage “which results in an Occurrence during the policy period.” The term “occurrence” was defined as an “accident, event or happening including continuous or repeated exposure to conditions which results, during the policy period, in Property Damage neither expected nor intended from the standpoint of the Insured.” The policies also contained a “sudden and accidental” pollution exclusion, which provided that the policies did not apply to damage:
arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land or the atmosphere, but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.
The State admitted that it could not differentiate expenses incurred to remediate property damage caused by “sudden and accidental” releases from damage caused by non-covered releases or leaks of contaminants. In affirming the Court of Appeal, the Supreme Court disapproved of cases relied on by the insurers – Golden Eagle Refinery Co. v. Associated Intl. Ins. Co. (2001) 85 Cal. App. 4th 1300 and Lockheed Corp. v. Continental Ins. Co. (2005) 134 Cal. App. 4th 184 – insofar as they held an insured must not only show a covered cause contributed substantially to the damages for which the insured was held liable, but must also show how much of an indivisible amount of damages resulted from the covered causes.
Instead, the Supreme Court reaffirmed its earlier decision in State Farm Mut. Auto. Ins. Co. v. Partridge (1973) 10 Cal. 3d 94, which held, in the context of an auto exclusion in a homeowners’ policy, liability coverage exists whenever an insured risk constitutes a proximate cause of an accident, even if an excluded risk is a concurrent proximate cause. The Court found that when the insurer has promised to indemnify the insured for all “sums which the Insured shall become obligated to pay . . . for damages . . . because of” nonexcluded property damage, coverage necessarily turns on whether the damages for which the insured became liable resulted – under tort law – from covered causes. Thus, the right to coverage in the third party liability insurance context draws on traditional tort concepts of fault, proximate cause and duty.
Applying Partridge’s concurrent cause analysis, the Court concluded that all indivisible damages assessed against the State would be covered based on just one “sudden and accidental” release as that release alone might be sufficient to render the State jointly and severally liable for the entirety of the cleanup, including that caused by the seepage from the site and the other releases that were not “sudden and accidental.”
The facts in State v. Allstate, involved placing hazardous wastes into evaporation ponds and releases from those ponds. The Supreme Court explained that an analysis as to whether a particular discharge is “sudden and accidental” must focus on the discharge that gave rise to the property damage. The State was not held liable for polluting the evaporation ponds, but for polluting the land and groundwater outside the ponds. The relevant discharge for application of the pollution exclusion, then, are those in which, due to the State’s negligence, pollutants were released from the evaporation ponds into the surrounding soils and groundwater.
This decision will serve as a critical weapon in the policyholder’s arsenal. Policyholders that previously thought they would not have coverage should reevaluate their potential coverages and, if appropriate, resubmit costs incurred that were previously denied.