Insurance Coverage
FEBRUARY 2003
California Court of Appeal Finds Coverage
for Environmental Matters Under Excess Policies
Where No Lawsuit Has Been Filed
A recent decision by the California Court of Appeal
mitigates the negative impact of an earlier decision
by the California Supreme Court in the context of
insurance coverage for environmental liabilities.
In 2001, in Certain Underwriters at Lloyd’s v.
Superior Court (Powerine Oil Co., Inc.), 24 Cal.4th
945 (2001) (Powerine I), the California Supreme Court
held that an insurer’s duty to indemnify the insured
“for all sums that the insured becomes legally
obligated to pay as damages” is limited to situations
where a court has ordered the policyholder to pay
money. In so ruling, the Court found that an insurer
under a commercial general liability (CGL) policy need
not pay the expenses that are ordered in an
administrative agency proceeding pursuant to
environmental statutes. In reaching its decision, the
Court focused its analysis on the term “damages.”
Contrary to the weight of authority from other
jurisdictions, the Court found that an interpretation
of “damages” that was limited to money ordered by a
court (and not any other agency or body) was
consistent with the traditional notion of damages and
consistent with the Supreme Court’s decision in
Foster-Gardner, Inc. v. National Union Fire Ins. Co.,
18 Cal.4th 857 (1998), which had required a suit in a
court as a pre-requisite to the duty to defend.
In Powerine Oil Co., Inc. v. Superior Court, 02
C.D.O.S. 12366 (Dec. 23, 2002) (Powerine II), the
California Court of Appeal, Second District, held that
the coverage provisions in nine excess/umbrella
liability policies obligated the insurer to indemnify its
insured for expenses incurred in responding to two
orders issued by the California Regional Water
Quality Control Board to remediate contamination. In
other words, the Court of Appeal found an
indemnification obligation under the excess/umbrella
polices notwithstanding the absence of any lawsuit
and the absence of a court order requiring the
payment of money. The Court distinguished FosterGardner and Powerine I finding that relevant
coverage language in the excess/umbrella policies
was different than that found in the CGL policies at
issue in Foster-Gardner and Powerine I.
The excess/umbrella policies in Powerine II 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.”
(Emphasis added.)
Kirkpatrick & Lockhart LLP
The policy defined “ultimate net loss” as follows:
polices in the absence of a lawsuit, those decisions
were based on the specific language before the
Court. As Powerine II demonstrates, coverage may
still be available even under California law under
separate, different policies if those policies include
different language. In matters where multiple years
and multiple layers of coverage are potentially
triggered, all potentially applicable policies should be
researched and analyzed for potential coverage.
“the total sum which the Insured, or any
company as his insurer, or both, become
obligated to pay by reason of . . . property
damage . . . either through adjudication or
compromise . . . and for litigation, settlement,
adjustment and investigation of claims and
suits which, are paid as a consequence of any
occurrence covered hereunder . . . .”
(Emphasis added.)
Relying on Foster-Gardner and Powerine I, the trial
court ruled that the excess/umbrella insurer had no
duty to indemnify the insured for the costs of
complying with the administrative order. The Court
of Appeal reversed, finding that the use of the term
“expenses” in the excess/umbrella policies broadened
the coverage beyond that found in the CGL policies
considered in Foster-Gardner and Powerine I which
had only covered “damages.” The Court of Appeal
also found the coverage for monies paid in
“compromise” eliminated any requirement of an
existing lawsuit and expanded the coverage beyond
the CGL policies as construed by Foster-Gardner.
Furthermore, the Court of Appeal held that the use of
the word “claim” in the definition of “ultimate net
loss” avoided the impact of Foster-Gardner because
the Supreme Court in Foster-Gardner had
distinguished between “claims” and “suits.” Thus,
the Court of Appeal concluded that the excess/
umbrella policies “provide broader coverage than the
coverage contained in the primary [CGL] policies, and
in particular, insure for losses not covered by the
primary policies.”
EDWARD SANGSTER
esangster@kl.com
415.249.1028
DAVID P. SCHACK
dschack@kl.com
310.552.5061
The Insurance Coverage practice group at Kirkpatrick &
Lockhart Nicholson Graham LLP offers an international
policyholder-oriented practice on behalf of Fortune 500 and
numerous other policyholder clients. Its lawyers have
authored Policyholder’s Guide to the Law of Insurance
Coverage and edited the Journal of Insurance Coverage.
For further information, please consult our website at
www.klng.com.
FOR ADDITIONAL INFORMATION concerning this topic or
K&L’s insurance coverage practice, please consult the K&L
office contacts listed below:
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Daniel A. Casey
Anthony P. La Rocco
Peter J. Kalis
Peter J. Kalis
Edward P. Sangster
Matthew L. Jacobs
The Court’s decision in Powerine II highlights the
importance of examining all potentially applicable
policies at the time of a loss or claim. While the
California Supreme Court’s decisions in FosterGardner and Powerine I limited coverage under CGL
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should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.
© 2003 KIRKPATRICK & LOCKHART LLP.
ALL RIGHTS RESERVED.