Insurance Coverage Alert
April 2008
Authors:
Michael S. Nelson
+1.412.355.6245
michael.nelson@klgates.com
Emily S. Gomez
+1.412.355.6374
emily.gomez@klgates.com
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Aerojet is the Latest in a Line of California
Cases That Potentially Limit Coverage for
Environmental Liabilities
The California Court of Appeal’s recent decision in Aerojet-General Corp. v. Comm.
Union Ins. Co., 155 Cal. App. 4th 132 (2007) may serve as a basis for insurers to try to
limit California policyholders’ rights to coverage for costs associated with environmental
remediation. Specifically, in Aerojet, the Court of Appeal ruled that cleanup costs from a
settlement negotiated after regulators filed suit alleging liability for CERCLA response costs
and other costs arising out of alleged groundwater contamination were not “damages” subject
to indemnification under the corporation’s excess liability policies. Id. at 143. Relying on
a prior decision from the Supreme Court of California that defined “damages” as “money
ordered by a court to be paid,” the Court of Appeal concluded that “because the [trial] court
did not order the payment of any money, the [insurers] had no duty under the terms of
their policies to indemnify Aerojet for the costs it incurred in implementing its settlement
agreement.” Id. at 145-46.
History
Beginning in 2000, regulatory agencies filed suits against Aerojet alleging its liability for costs
relating to groundwater contamination in the San Gabriel Valley. Id. at 135. Aerojet gave its
insurers notice of each lawsuit, though no excess carrier accepted the company’s tender of
defense or indemnity. Aerojet subsequently settled the lawsuits for a total of $175 million, an
amount that exceeded the total amount of its primary and excess insurance for each year in
the period of 1958 to 1970. Id. When Aerojet demanded payment pursuant to its policies, all
excess carriers denied liability. Consequently, Aerojet filed suit for breach of contract.
The excess liability policies at issue all contained insuring agreements and attachment of
liability clauses that were substantially similar. The insuring agreements required the insurer
to indemnify Aerojet for “all sums which the Assured shall become legally obligated to pay,
or by final judgment be adjudged to pay, to any person or persons as damages . . . .” Id. at
137 (emphasis added). The attachment of liability clauses provided that the excess insurers
were not liable to pay until either the underlying insurers admitted liability or the insured was
held liable to pay by a final judgment an amount which exceeded the underlying insurance
and the underlying insurers had paid or been held liable to pay their full limits. Id.
After the close of discovery, each of the insurer-defendants filed separate motions for summary
judgment. The trial court granted summary judgment based on two of those motions, holding
that the “language in the policies at issue providing for payment of sums Aerojet becomes
legally obligated to pay as damages is limited to sums Aerojet was ordered by pay by the
court. The monies paid by Aerojet in settlement do not meet this definition.” Id. at 139. Aerojet
appealed the summary judgment ruling.
Foster-Gardner and Its Progeny
The Court of Appeal began its analysis by revisiting a line of environmental insurance
coverage cases that arose out of the California Supreme Court’s 1998 decision in FosterGardner, Inc. v. National Union Fire Ins. Co., 959 P.2d 265 (Cal. 1998). In Foster-Gardner, the
Insurance Coverage Alert
court determined that an insurer’s duty to defend was
limited to civil actions prosecuted in a court. Focusing
on the phrase “suit seeking damages” in the coverage
grant, the California Supreme Court concluded that
a proceeding conducted by an administrative agency
pursuant to an environmental statute was not a “suit”
that gave rise to a defense duty, but was a “claim” that
the insurer had authority to investigate and settle but
no duty to defend under the policy. Id. at 265.
The California Supreme Court took this strict
interpretive approach one step further in Certain
Underwriters at Lloyd’s of London v. Superior Court,
16 P.3d 94 (Cal. 2001) (“Powerine I”). Like FosterGardner, that case involved a coverage dispute
that arose out of administrative orders directing the
policyholder to remediate contaminated third-party
property. In Powerine I, the California Supreme Court,
relying on the policy language at issue, held that the
insurer’s duty to indemnify “all sums that the insured
becomes legally obligated to pay as damages” is
limited to “money ordered by a court.” Id. at 94. To
support its position, the court developed the so-called
“Foster-Gardner syllogism,” which states that:
The duty to defend is broader than the duty to
indemnify. The duty to defend is not broad enough
to extend beyond a “suit,” i.e., a civil action
prosecuted in a court, but rather is limited thereto.
A fortiori, the duty to indemnify is not broad enough
to extend beyond “damages,” i.e., money ordered
by a court, but rather is limited thereto.
Id. at 94.1 The court went on to find that, based on the
specific policy language before it, no legal obligation
to pay “damages” arose absent an order of court and,
therefore, the duty to indemnify did not “extend to
any expenses required by an administrative agency
pursuant to an environmental statute. . . .” Id.
In two separate but related cases, the court applied
Powerine I to determine the indemnity obligations of
excess insurers. In Powerine Oil Co., Inc. v. Superior
Court, 118 P.3d 589 (Cal. 2005) (“Powerine II”),
the court found that an excess insurer had a duty
to indemnify costs arising out of an administrative
cleanup order because the “ultimate net loss” definition
1
Of course, the major premise of this proposition is based
on conclusions reached in the Foster-Gardner decision that
are arguably inconsistent with both the policy language and the
reasonable expectations of the insured at the time the policy was
underwritten.
referenced in the coverage grant included the amount
the insured became obligated to pay “either through
adjudication or compromise, and shall also include .
. . expenses . . . for litigation, settlement, adjustment
and investigation of claims and suits . . . .” Id. at 589
(emphasis in original). By contrast, in County of San
Diego v. Ace Property & Casualty Ins. Co., 118 P.3d
607 (Cal. 2005) (“County of San Diego”), the coverage
dispute arose out of policy language that required the
insurer to indemnify “all sums which the insured is
obligated to pay by reason of liability imposed by law
or assumed under contract or agreement [arising from]
damages caused by personal injuries or the destruction
or loss of use of tangible property.” Id. Analyzing this
language, the court found that “damages” was the “sole
term of limitation of the indemnity obligation under the
insuring agreement” and, therefore, settlement costs
agreed to outside the context of a court suit were not
subject to an indemnity obligation under the excess
policy. Id.
The Court of Appeal Applied FosterGardner and its Progeny to the
Aerojet Policies
Foster-Gardner and the cases that followed were
limited to administrative claims and did not purport
to decide whether settlement costs negotiated within
the context of a lawsuit constituted “damages” for
the purposes of an insurance contract. Despite the
limited scope of Foster-Gardner and its progeny, the
Court of Appeal in Aerojet found that those cases
were controlling given the contract language at issue.
The Court of Appeal noted that nothing in the record
indicated that the trial court ordered Aerojet to make
any payments, nor was there any evidence that the
parties to the settlement agreement sought for the
terms of the agreement to be entered as a judgment
entered as part of the trial court record. Id. at 144.2
The Court also noted that, unlike the policies at issue
in Powerine II, there was no language in the Aerojet
policies suggesting that indemnity is owed for anything
other than “damages.” Id. at 143. As a result, the court
concluded that the settlement costs were outside the
scope of indemnity coverage. Id. at 144.
The court indicated that it was aware of a letter written by
Aerojet’s counsel proposing that the settlement agreement be
entered as a stipulated judgment to protect against the coverage
problems potentially created by Powerine I. Id. at 147.
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Insurance Coverage Alert
Next, the Court of Appeal examined the attachment
of liability clause in the insurance contracts. Aerojet
argued that the settlement agreement constituted a
final judgment for purposes of the clause, noting that
the plaintiffs in the underlying action withdrew their
complaints after settlements were reached. Id. at 146.
The court rejected this argument, observing that the
plaintiffs did not dismiss their actions with prejudice.
Because the plaintiffs were free to file suit again,
the court found that there was no legal bar to further
litigation and the settlement agreement could not be
seen to act as a final judgment. Id.
Lastly, the court examined whether the insurer
defendants were equitably estopped from relying on
the terms of the indemnity agreements on the grounds
that Aerojet kept the insurers apprised of its settlement
strategy and negotiations, and reasonably relied on
them to voice any concerns or objections. Id. The court
dismissed this argument outright, noting that there was
no evidence that the insurers intended for Aerojet to
settle the underlying lawsuits, nor any evidence that
Aerojet could reasonably have believed the insurers
intended such.
Conclusion
The Aerojet decision is the latest in a line of California
appellate cases that insurers will argue serves to limit
an insurer’s obligations to defend and indemnify
settlements resolving environmental damage claims.
It is important to note that Aerojet and its predecessors
are inapplicable in disputes arising out of policies that
require the insurer to defend and indemnify against
something more than just “damages.” Moreover, it
is not certain that Aerojet is applicable outside of the
environmental context. In coverage disputes arising
out of claims alleging bodily injury as a result of
exposure to asbestos or silica dust, for example, the
underlying claims are typically litigated in court,
although they are frequently settled before a verdict is
rendered following a trial. It is unclear whether those
types of settlements would need to be memorialized
in a judgment entered on the docket in order to satisfy
Aerojet. At a minimum, this decision will lend support
to unreasonable interpretations of policy language
advanced by insurers who seek to escape their coverage
obligations.
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