The California Court of Appeal has held that the term “damages” under a standard CGL policy means court-ordered judgments and that affirmative defenses are not “suits” that trigger a duty to defend. (CDM Investors v. Travelers Cas. And Sur. Co. (2006) 43 Cal.Rptr.3d 669)
Facts
CDM Investors (CDM) owned commercial real property that it had leased to tenants. In 1989, the California Water Quality Control Board (Board) suspected that CDM was discharging pollutants into the soil and groundwater in the vicinity of the property and ordered CDM to test the property for pollutants. CDM claimed coverage under two standard CGL policies issued by Transamerica Insurance Group (TIG) and Travelers Casualty and Surety Company (Travelers). Both Travelers and TIG denied CDM’s claim. At issue before the court was whether either of the policies provided coverage for “response costs” i.e., the costs CDM incurred when the Board ordered CDM to test for pollutants.
Holding
The Court of Appeal held that there was no coverage under TIG’s policy because it expressly excluded “loss cost or expense arising out of governmental direction or request that [CDM] test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants.”
The insuring agreement in the Travelers policy stated that Travelers would pay “the ultimate net loss which the insured [would] become legally obligated to pay as damages.” CDM argued that because the definition of “ultimate net loss” included all expenses incurred by the insured in the investigation and defense of claims or suits seeking damages, that provision expanded the definition of “damages” to include the response costs the Board had ordered CDM to incur. The Court of Appeal rejected that argument, holding that the “ultimate net loss” was what Travelers would pay, after it became obligated to pay, and the trigger of its obligation to pay was “damages.” The term “damages” the Court ruled, clearly denoted only court-rendered damages.
Finally, CDM asserted that shortly after the Board’s order, it sued its former tenants under CERCLA in federal court to apportion its liability for the response costs. The tenants raised affirmative defenses seeking to apportion the responsibility to CDM. CDM asserted that, because of those affirmative defenses, TIG and Travelers had an obligation to defend CDM with respect to the tenants’ claims. The Court also rejected that argument, holding that the tenants’ affirmative defenses did not constitute a “suit.”
Comment
This case reiterates earlier rulings in Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857 and Certain Underwriters at Lloyd’s of London v. Superior Court (2001) 24 Cal.4th 945, in which the California Supreme Court found no coverage for environmental liability imposed by state and federal administrative agencies.