National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

(1) Does application of the sudden and accidental pollution exclusion clause turn on when waste material was discharged from the Stringfellow Acid Pits waste disposal site or when the waste was initially deposited into the site?

The trial court ruled the relevant discharge was the discharge to the landfill, not the later discharge from the facility, following Standun, Inc. v. Fireman's Fund Ins. Co. (1998) 62 Cal.App.4th 882. The appellate court reversed, and the Supremes agreed, holding that on these facts, relevant was the release of pollutants from containment not to the containment. This was because the State was being held liable, as the entity that sited, designed, built, and operated the facility with its evaporation ponds, for failing to contain the pollutants; it was not being held liable for pollluting the evaporation ponds.

The Supreme Court found the earlier landfill case (Standum) consistent because, there, the liability of the insured (a manufacturer of liquid wastes deposited on the soil at the landfill) was being held liable for disposing wastes at the landfill. The crucial issue for application of the coverage question, according to California’s highest court, was examining the basis for the insured’s liability.

(2) If pollution is caused by both non-covered events and covered accidents, does the insured have the burden at trial to prove that all of the damages it seeks to recover were caused by a covered event, or is there a duty to indemnify when two concurrent causes are responsible for an injury even if one of the causes is not covered?

The Supreme Court agreed with the appellate court on this issue as well and disapproved of Golden Eagle Refinery Co. v. Associated Int. Ins. Co. (2001) 85 Cal.App.4th 1300 and Lockheed Corp. v. Continental Ins. Co. (2005) 134 Cal.App.4th 184, to the extent those earlier decisions are incompatible.

In Stringfellow, there were many claimed causes of the pollution, including underground leaking, and two major overflow incidents, the latter which the State claimed were sudden and accidental. The State admitted it could not differentiate the damage caused by the different sources of contamination, nor could it differentiate the different work that had been necessitated by the pollution based on its cause.

Under the California Supreme Court's decision in State Farm Mut. Auto. Ins. Co. v. Partridge (1973) 10 Cal.3d 94, where there is indivisible harm from both a covered and non-covered cause, the insured is entitled to full coverage. This is a unwelcome decision for insurers who argued, consistent with Golden Eagle, that the insured should have the burden of proving what part of the damage was caused by a covered event. Even so, the insured still has to prove there is a covered cause of the damage, and that the covered cause was a substantial factor in the property damage. The covered cause cannot be speculative or have only contributed trivially to the property damage. Furthermore, the Supreme Court explained, the insurer can counter the insured’s evidence of a covered cause that is a substantial factor in causing indivisible harm, by evidence that damages are divisible and that only a limited portion of those damages resulted from covered causes.

(3) If the insured takes remedial steps to prevent harm that might have been an accident and covered, is the remedial action covered?

In what may be the most surprising aspect of this decision, the Court ruled that there could be coverage for damage caused not by an accident but by deliberate preventative steps taken by the insured to avoid an accident (here, another flooding) to happen. Whether the action taken in fact avoided a covered event was a factual issue still to be tried.

The Court reasoned that policies cover costs to prevent harm, and that this result would be consistent with an insured’s reasonable expectations., and would encourage measures to mitigate and prevent damage. The Court cites no policy language in support of its holding which appears to emphasize public policy over contract interpretation.

On the most recent decision (State of Calif. v. Continental Ins. Co.), we reported in October that the California appellate court had issued a tentative decision prior to oral arguments. The court’s final decision is consistent with the indication of its leanings. The lengthy decision contains the following rulings:

• "All sums" rule applies - In a continuous loss situation, each insurer that covers any part of the claim has an obligation to pay the entire claim, and then seek reimbursement from other insurers.  This was suggested by earlier cases and is the approach taken by many courts around the country.
• The insured can stack policy limits across policy periods (absent policy language on the issues) - There was nothing in the policies or law that precluded stacking of policies across applicable policy periods. This is a rejection of FMC Corp. v. Plaisted & Cos. (1998) 61 Cal.App.4^th 1132.  
• Self-insured retentions (“SIRs”) must be paid under each excess policy (dicta) - If multiple policies each with an SIR are implicated, the court should require each SIR to be paid prior to coverage being available under the excess policy.
• Distinction between deductibles and SIRs (dicta) - Deductibles are typically found in personal liability policies whereas SIRs are found in commercial policies. In policies with SIRs, limits are paid after payment of SIR but deductibles reduce policy limits.
• Only a single occurrence was at issue – There were not four occurrences (i.e., (1) escape of contaminants through fractures in the rocks; (2) escape through the barrier; (3) escape through the underground streambed; and (4) an overflow from the pit).  The single occurrence was the continuing exposure to the conditions (plural) at the site which combined to cause on-going contamination when the waste was put into the site.  The court likened the site to a sieve with multiple holes; each hole is not a separate occurrence.  The overflow from the pit did not constitute a separate occurrence because the State failed to show it resulted in separate damage.
• No annualization of limits - There was no language in the multi-year policies indicating the limits were intended to apply annually.
• The trial court's "set off" ruling is moot in light of the reversal of the trial court's no-stacking ruling and the size of the total loss.
• Mitigation of damages doctrine did not apply - This defense is not available to insurers who claim the insured failed to take steps which would have reduced its damages (and inured to the insurer's benefit).
• The trial court did not abuse its discretion in declining to apply the ancient documents or business records exceptions to the hearsay rule. Documents located in the excess insurers underwriting file could not be properly authenticated and presented in order to meet the requirements of those evidentiary rules.

According to the tentative, the court is leaning towards confirming California follows an “all sums” approach to an individual insurer’s liability (once its policy is proven to provide cover) for property damage that continues over many years. The court is also inclined to rule the insured can “stack” the insurance policies. That is, the insured is permitted to stack policies across policy periods. The appellate court opined that FMC Corp. v. Plaisted & Cos. (1998) 61 Cal.App.4^th 1132(which held multiple policies’ occurrence limits could not be stacked) was not well-reasoned. While not criticizing the trial court for feeling it was bound by the FMC decision, the appellate court intends (unless persuaded otherwise) to hold FMC was wrong.

On other issues, the appellate court appears inclined to rule for the insurers. The court’s tentative indicates it agrees with the trial court’s finding of only one occurrence and that policy limits for multi-year policies were per occurrence not annual.

Meanwhile, briefing has been completed on other important pollution-coverage issues pending before the California Supreme Court in the Stringfellow case. Before the Supremes are the following issues: (1) Does application of the pollution exclusion clause turn on when waste material was discharged from the Stringfellow Acid Pits waste disposal site or when the waste was initially deposited into the site? (2) If pollution is caused by both uncovered intentional actions and covered accidents, does the insured have the burden at trial to prove that all of the damages it seeks to recover were caused by a covered event, or is there a duty to indemnify when two concurrent causes are responsible for an injury even if one of the causes is an uncovered act?

The Court of Appeal had rejected the insurers' contention, based on Standun, Inc. v. Fireman's Fund Ins. Co. (1998) 62 Cal.App.4th 882, that the relevant release for purposes of applying the "sudden and accidental" pollution exclusion was the deposit of waste into the site. The Court distinguished Standun because the insured in Standun was held strictly liable as a waste generator that purposefully and regularly disposed of waste at the site.  Here, the court held, the State's liability for the negligent design, construction and operation of the Stringfellow Site shifted the focus from the initial deposit to subsequent releases from the site.

The Court of Appeal also concluded Golden Eagle Refinery Co. v. Associated Internat. Ins. Co. (2001) 85 Cal.App.4th 1300 and Lockheed Corp. v. Continental Ins. Co. (2005) 134 Cal.App.4th 184 are incompatible with the California Supreme Court's decision in State Farm Mut. Auto. Ins. Co. v. Partridge (1973) 10 Cal.3d 94. The court held, applying Partridge, that the State would be entitled to full coverage even if damage was partially caused by an excluded event and the damage was indivisible.

We will report further as these courts issue final rulings on the various aspects of the case.