Whether Insurer Has Duty to Defend and Indemnify Insured in Administrative Proceeding Depends on Policy Language ( Ameron International Corporation v. Insurance Co. of the State of Pennsylvania (2007) 150 Cal.App.4th 1050)
A recent ruling from the California Court of Appeal emphasizes that whether a liability insurer has a duty to defend and indemnify an insured in an administrative proceeding depends on the precise language of the policy.
In 1975, the United States Department of the Interior’s Bureau of Reclamation (Bureau) entered into a general contract with Peter Kiewit Sons’ Company (Kiewit) for the manufacture and installation of concrete siphons for an aqueduct project. Kiewit in turn entered into a subcontract with Ameron International Corporation (Ameron) to manufacture the siphons. The subcontract gave Kiewit indemnity rights against Ameron and Kiewit was listed as an insured under Ameron’s insurance policies.
After discovering defects in the siphons, the Bureau sought approximately $40 million in damages from Ameron and Kiewit. Ameron and Kiewit elected to challenge the Bureau’s claim in a lengthy administrative hearing before the United States Department of Interior Board of Contract Appeals (IBCA). Ameron notified various primary, excess and/or umbrella insurers of the Bureau’s claims, but the insurers failed to defend Ameron or Kiewit in the ICBA proceeding. During the course of the administrative proceeding, Ameron and Kiewit settled the Bureau’s claims for $10 million.
Ameron, in its own right and as an assignee of Kiewit’s rights, then sued the various insurers which had failed to defend and indemnify Ameron and Kiewit against the Bureau’s claims before the ICBA. After the insurers successfully demurred to Ameron’s complaint, the California Court of Appeal ruled as follows:
First, some of the insurers had issued policies requiring the insurer to defend the insured against any “suit” seeking “damages,” without defining either “suit” or “damages.” The Court of Appeal held that these insurers had no duty to defend or indemnify Ameron or Kiewit in the ICBA administrative proceeding. Specifically, citing Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857 and related cases, the Court of Appeal held that unless the policy provides otherwise, the term “suit” means “a civil action commenced by filing a complaint” and the term “damages” means “money ordered by a court.” Since the IBCA proceeding was not a civil action commenced in a court of law, but rather was an administrative hearing, there was no potential for coverage under these policies, and hence no duty to defend.
Second, some of the insurers had issued policies requiring the insurer to defend the insured against any “suit” seeking damages, and specifically defining the term “suit” as a “civil proceeding… includ[ing] an arbitration proceeding alleging…damages.” The Court of Appeal found that these insurers did have a duty to defend Ameron and Kiewit in the ICBA administrative proceeding. Specifically, since these policies did define “suit” so as to include a “civil proceeding,” the term “suit” was reasonably susceptible to more than one interpretation, including the IBCA administrative proceeding. Further, since the policies’ definition of “suit” included an “arbitration proceeding alleging damages,” the term “damages” could not necessarily be restricted to money damages ordered by a court.
Third, some of the umbrella insurers had issued policies providing the insured with indemnity coverage for “loss.” Since these policies did not define “loss,” the Court of Appeal looked to common usage of “loss” and concluded that, in the insurance context, “loss” means “the amount of financial detriment caused by an insured person’s death or an insured property’s damage, for which the insurer becomes liable.” According to the Court of Appeal, this definition of “loss” is broader than the common meaning of “damages,” and is not limited to money damages ordered by a court. Thus, insurers issuing these policies could have a duty to indemnify Ameron and Kiewit in the ICBA administrative proceeding.