Quote of the Day - There is case after case on the books that have upheld the validity of flood exclusion language, exactly the language Mr. Scruggs is contesting. - Joseph Annotti
California Supreme Court Finally Clarifies Insurance Pollution Exclusion Provisions
The California Supreme Court issued its long-awaited decision unanimously interpreting pollution exclusion provisions in comprehensive general liability insurance policies. The Court defined the meaning of the policy term "sudden and accidental" for discharges on land and air and the "absolute pollution exclusion," which in three out of the four insurance policies at issue applied to discharges into watercourses. The Court went on to describe how to allocate the burden of proof between covered and non-covered claims in the case entitled: State of California v. Allstate Insurance Co.
Let's do a little bit to set the stage first. The State of California made a $500 million claim for contamination of Pyrite Creek in Riverside County against four insurers: Allstate, Century Indemnity, Columbia Casualty and Westport Insurance. The contamination was caused by several factors: gradual leaks in the bed of a canyon dammed by the State in the 50's to hold some 30 million gallons of industrial waste and overflows from holding ponds into the Creek caused by heavy rains and emergency releases of one million gallons into the Creek to prevent the loss of the entire containment (known as the Stringfellow Acid Pits) into the Creek.
So to tally the score, it was a split decision. The trial court decided in favor of the insurers on the State's claim. The appellate court reversed. The Supreme Court went down the middle, holding partially for the insurers and partially for the State. Here's the scorecard:
The "Relevant Discharge"
First, we have a general liability policy that contained a "sudden and accidental pollution exclusion," which required the Court to determine which discharge caused the insured's liability. The Court decided it mattered what came out instead of what went in. Where contaminated waste is deposited into a site intended to contain the waste, it is the "discharge" from or out of the site that the policy covers, not the placement into or onto the site.
But in other cases, it may be when the insured deposits pollutants directly onto land or water without any effort to contain them, then the initial deposit may be considered the discharge. The Court held that there may even be two different discharges that trigger coverage: both the initial deposit and then the subsequent escape of the contamination.
Just to confuse things that much more.
The Meaning of "Sudden and Accidental"
Here are the particulars: we have a 20-inch rainstorm that caused the site to flood, waste ponds to overflow, and sent contaminated water flooding down a canyon. The Court ruled that event (the rainstorm) fell within the "sudden and accidental" exception to the pollution exclusion, but not because of the event. The dispute between the State and the insurers centered on whether the contamination was discharged onto land (within the language of the sudden and accidental pollution exclusion) or a watercourse (excluded under the absolute pollution exclusion).
The Court found in favor of the insurers who contended the flood waters flowed directly from the site into a creek rather than onto surrounding land. The Court held, however, that the insurer has the burden of showing that the overflow was confined to the channel of the stream (even if the creek was not flowing at the time). Like most other California watercourses, Pyrite Creek is mostly a dry bed.
The heavy rains threatened imminent failure of the retention dam in the canyon. To prevent that failure, the State deliberately made controlled discharges from the ponds and contended the releases were "sudden and accidental." The State's chief geologist had earlier recommended that the site be leveled and capped to prevent pond flooding in heavy rains, but it was never done.
Had the state followed this recommendation, the subsequent releases would not have occurred.
The Court rejected the insurers' arguments that these controlled discharges were not "accidental," holding instead that liability policies cover damages resulting from an act undertaken to prevent a covered source of injury from occurring, even if that act would otherwise not be covered.
The Court found that the intentional mitigation to avoid a covered event makes sense as a matter of causation, is consistent with the reasonable expectations of the insured, and does not harm the insurers since they would be responsible for greater liability had the measures not been taken.
Due to the threatened "sudden and accidental" release of waste from the site, the State's intentional releases prevented a greater accidental release and consequently the State's claims were not barred by the qualified pollution exclusion. The Court further held that the State's awareness of the risk of the event is not equivalent to its knowing that the damage was "substantially certain or highly likely" to occur. Showing that the State "should have known" that the damage would occur was insufficient. The Court held there was an issue of fact concerning the level of the State's knowledge that will require a further trial.
We haven't seen the last of this case yet.
Proximate and Concurrent Causation
The most significant aspect of the case came in the Court's holding that because the State could not allocate remediation attributable to the "sudden and accidental" discharges from continuous subsurface leakage, the entire injury was "indivisible" and the insurers were liable to the full extent of the insured's liability.
Go ahead. You try to break that long sentence up into two.
Once the State proves that the damage from concurrent causes ("sudden and accidental" events and subsurface leakage) was indivisible, the burden shifts to the insurer to prove otherwise. The Court expressly disapproved Golden Eagle Refinery Co. v. Associated Internat. Ins. Co., 85 Cal.App.4th 1300 (2001), and Lockheed Martin Corp. v. Continental Ins. Co., 134 Cal.App.4th 187 (2005), to the extent they held the insured has the burden of showing "how much of an indivisible amount of damages resulted from covered causes."
When an insured proves that multiple acts or events caused a single injury or an indivisible amount of property damage and one or more of the covered causes would have rendered the insured liable for all of the damages, the insured's inability to allocate damages does not excuse the insurer from its duty to indemnify it for all of the damage. The Court noted that its decision does not extend to indemnity situations where the insured can only speculate that polluting events were "sudden and accidental" or where "sudden and accidental" events contributed only trivially to the property damage. The "sudden and accidental" events must have caused an "appreciable amount" of damage.
Sure, it's a torturous decision to follow, but let's put it this way: if one covered event contributes contamination to an uncovered event, the uncovered event doesn't matter - the whole thing is covered. Maybe. That's the lawyer in me talking, though.
Otherwise, you can read the entire 37 pages of the opinion.
MIPTC gives a big hat tip to my partner at Sedgwick, Laura Goodman, for providing this analysis. I added a few facts and remarks.