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California Supreme Court all b...

California Supreme Court all but overrules Foster-Gardner finding administrative proceeding constitutes “suit” for purposes of an insurer’s duty to defend

By Bret A. Stone

After 12 years of being the only state to have a “bright-line rule” that administrative proceedings are not “suits” under insurance policies, the California Supreme Court appears to has taken a giant “step in the right direction” as Justice Kennard put it in her concurring opinion in Ameron Int’l Corp. v. Insurance Co. of the State of PA (2010) 50 Cal.4th 1370. The High Court’s previous stance was a narrow interpretation of “suit” as a “court proceeding initiated by the filing of a complaint.” Foster-Gardner Inc. v. National Union Fire Ins. Co. (1998) 18 Cal. 4th 857, 887. This time, the Court determined that an administrative proceeding before the U.S. Department of Interior Board of Contract Appeals constituted a “suit” triggering the insurers’ duty to defend.

Ameron argued that Foster-Gardner was not applicable because the proceeding was a “suit” as a reasonable insured would understand the term, in contrast to the pollution remediation order for which the insured sought coverage in Foster-Gardner. The insured pointed out that the proceeding was before a quasi-judicial administrative agency board and required the filing of notice and a complaint setting forth “simple, concise and direct statements of each claim.” During hearings, parties may subpoena witnesses and introduce evidence; witnesses are sworn in, and party representatives may cross-examine them; and all evidence is subject to the “generally accepted [federal] rules” of admissibility. In addition, administrative law judges are empowered to grant the same relief that would be available to a litigant asserting a contract claim in the Court of Federal Claims. The role of the administrative law judge within this framework is comparable to that of a trial judge; the judge may issue subpoenas, rule on proffers of evidence, regulate the course of the hearing, and make or recommend decisions. Indeed, the court seemed more than impressed that the administrative proceeding went on for 22 days, in which witnesses testified and were cross-examined (e.g., very court-like).

Overall, the majority opinion in the Ameron case all but overruled Foster-Gardner by severely limiting its application. As Justice Kennard points out in her concurring opinion, following Foster-Gardner similar cases around the country refused to adopt the “bright-line rule.” The Ameron decision is significant as the Supreme Court steps over the bright line by finding coverage for a suit-like administrative proceeding that requires a complaint or complaint-like pleadings. How will this be applied in the environmental context where most PRP letters are not quite complaint-like? Insurers will no doubt make the argument that Foster-Gardner still applies. But many of those letters have an appeal process. Cleanup and Abatement Orders, which are more complaint-like with findings of fact and conclusions of law may become more prevalent, even insisted upon by savvy insureds.

Another, less highlighted, aspect of the Ameron case is that the proceeding at issue was actually commenced by the insured. Once the Bureau assessed the insured responsible for damages, the insured both appealed the decision by commencing an administrative proceeding and sought protection from its insurer. This point was not directly addressed anywhere in the decision but will undoubtedly be useful for policyholders seeking coverage for affirmative claims which are, in essence, defensive strategies. A common example of this is a third party action affirmatively filed by the defending insured.

In sum, because the Supreme Court avoided overruling Foster-Gardner, further litigation testing the waters after Ameron will be required before the results are clear. Overall, as Justice Kennard puts it so well, this decision is a “step in the right direction.” Given the uniform rejection of the logic of the so-called “bright-line rule” in so many other jurisdictions across the country, we can only hope that, sooner or later, the court will forthrightly admit its earlier mistake and, when the opportunity presents, will inevitably and directly overrule the now-discredited Foster-Gardner decision.

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