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CGL Policy Covers Pollution Liability Arising from Indivisible Covered and Non-Covered Events, California Supreme Court Holds
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July 6, 2009
(This paper first was published on Insurance Law 360. It is reprinted with permission of Portfolio Media, Inc.)
By Stephen V. Masterson
Howrey LLP
The California Supreme Court recently considered whether comprehensive general liability (CGL) policies insuring against liability for damage caused by the sudden accidental release of pollutants cover clean-up liabilities imposed on the State of California as a result of discharges from its Stringfellow hazardous waste disposal facility.
Applying long-standing principles of California law, a unanimous court held that:
|  | An insured who proves that covered sudden and accidental releases of pollutants contributed substantially to indivisible property damage does not bear the further (often impossible) burden of proving how much of its liability is traceable to covered releases; and
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| | The relevant “release” was the discharge of chemicals from Stringfellow’s unlined containment ponds not the (intentional) deposit of waste into those ponds.
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California v. Allstate Insurance Co., 45 Cal.4th 1008, 90 Cal.Rptr.3d 1 (2009).
Which party bears the burden of dividing liability for property damage into that caused by covered releases and that caused by other releases can be outcome-determinative in environmental insurance coverage litigation. If the damage is indivisible and the burden is on the insured, there is no recovery. If burden is on the insurer, the entire loss may be covered (subject to policy limits).
In the Allstate case, the CGL policies at issue contained a standard qualified pollution exclusion barring coverage for property damage liability “arising out of the discharge, dispersal, release or escape of... pollutants into or upon land” but reinstating coverage “if such discharge, dispersal, release or escape is sudden and accidental.”
It was undisputed that a significant amount of the Stringfellow contamination was caused by prolonged leakage from the ponds. It also was undisputed that this seepage was not a covered sudden and accidental release.
But, California produced evidence that two “sudden and accidental” releases from the Stringfellow facility also were substantial factors in causing the soil and groundwater contamination.
In 1969, an extraordinary rainstorm caused the Stringfellow waste ponds to overflow. And, in 1978 the state made a series of controlled discharges when extraordinary rains filled the ponds to near overflowing and caused a retention dam to begin failing. The state admitted that it could not differentiate the damage caused by these two releases from the damage caused by uncovered gradual leakage.
The trial court placed the burden on the state to trace a portion of its liability to the two identified releases. Because the state admitted that it could not prove how much of the Stringfellow property damage was caused by sudden and accidental releases, the trial court ruled that the state could not recover anything under its insurance policies and granted summary judgment for the insurers.
The California Supreme Court found that the trial court had misplaced the burden of differentiation and, invoking principles it had articulated 36 years earlier, held that the policies cover “the state’s liability for indivisible damage caused partly by covered causes and partly by excluded causes.” See, State Farm Mutual Automobile Insurance Co. v. Partridge, 10 Cal.3d 94 (1973).
In that case from 36 years ago, Mr. Partridge was the named insured under both an automobile policy and a homeowner’s policy. He and a friend were hunting jackrabbits from his Ford Bronco while a third passenger sat between them. When Mr. Partridge drove off the road in pursuit of a rabbit, the .357 Magnum pistol he had modified with a “hair trigger” fired and seriously injured the middle passenger.
Coverage for Mr. Partridge’s liability under the automobile policy was not disputed, but the insurer argued that there was no coverage under the homeowner’s policy, which excluded injuries “arising out of the use” of an automobile.
The Partridge court described the crucial question before it as “whether a liability insurance policy provides coverage for an accident caused jointly by an insured risk (the negligent filing of the triggering mechanism) and by an excluded risk (the negligent driving).”
The answer was yes: “when two such risks constitute concurrent proximate causes of an accident, the insurer is liable so long as one of the causes is covered by the policy.”
The Allstate court explained that its conclusion in Partridge – “liability coverage exists ‘whenever an insured risk constitutes a proximate cause of an accident, even if an excluded risk is a concurrent proximate cause’ – applies equally to coverage for the state’s Stringfellow liability.
Under Partridge, if “the insured’s nonexcluded negligence ‘suffices, in itself, to render him fully liable for the resulting injuries’ or property damage, the insurer is obligated to indemnify the policyholder even if other, excluded causes contribute to the injury or property damage.”
If sudden and accidental releases in 1969 and 1978 were substantial factors in causing indivisible damage, the court held that they “would have rendered the state fully liable for contamination of soils and groundwater below the Stringfellow site, without consideration of the subsurface leakage,” and the state’s liability would be covered.
The fact that excluded subsurface leakage “also contributed to the contamination is insufficient to defeat coverage” under Partridge, the court held.
The Allstate court’s application of Partridge to pollution liability coverage is not surprising. Counsel for policyholders in environmental insurance litigation have been citing Partridge for decades. More remarkable is the frequency with which lower courts tended to ignore the authority of Partridge.
As the Allstate court noted in disapproving Golden Eagle Refinery Co. v. Associated International Insurance Co., 85 Cal.App.4th 1300 (2001), the Golden Eagle decision “does not address” Partridge.
In Golden Eagle, the insured refinery sought coverage under CGL policies with qualified (“sudden and accidental”) pollution exclusions. The contamination at issue had been caused in part by events that were sudden and accidental and in part by events that were not, and the insured’s liability was indivisible. The insured argued that it was sufficient to show that covered events were a substantial cause of the indivisible contamination.
The Golden Eagle court rejected this argument and ruled that the insured’s “admitted inability to present evidence differentiating, quantifying, and allocating the contamination from each of the sources [was] absolutely fatal to all of its claims for indemnity.” The court reasoned that Golden Eagle’s insurance claim was a contract claim requiring proof of causation and the amount of damages.
“Substantial cause may be sufficient to make a prima facie case in a tort action in order to support a joint and several judgment, but in the context of a coverage dispute relating only to the duty to indemnify, the tort threshold is not sufficient,” the Golden Eagle court wrote.
The Allstate opinion highlights this language as revealing the “fundamental flaw in Golden Eagle’s reasoning” and explains that, to the contrary, “such tort law (substantial factor) causation is sufficient to create coverage under a liability policy when covered and excluded acts or events have concurred in causing injury or property damage.”
When, as in most CGL policies, “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, or similar language, coverage necessarily turns on whether the damage for which the insured became liable resulted – under tort law – from covered causes.”
The contours of the state’s liability also informed the Allstate court’s analysis of what was the relevant release for application of the qualified pollution exclusion. The insurers argued that coverage was excluded because the initial deposits of waste into the unlined ponds were not sudden and accidental.
In rejecting this argument, the Supreme Court focused on the fact that “[t]he state was not held liable for polluting the evaporation ponds, but for polluting the land and groundwater outside the ponds.”
The discharges relevant to the pollution exclusion were the liability-causing events, namely “those in which, due to the state’s negligence, pollutants were released from the Stringfellow evaporation ponds into the surrounding soils and groundwater.”
Notably, the court also found that the pollution exclusion was ambiguous and rejected the insurers’ interpretation for the further reason that “[a] reasonable insured would not understand an exclusion for ‘release’ of pollutants to apply where, as here, the wastes are deposited into intended containment ponds and do not behave as environmental pollutants until they are later released or discharged from the ponds.”
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For more information about the issues covered in this report, please contact Stephen Masterson in our Los Angeles office at 213-892-1992 or at MastersonS@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2009 Howrey LLP
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