The California Court of Appeal has held that, where covered and non-covered events are concurrent causes of indivisible pollution damage, an insured seeking indemnity under a liability policy is not required to allocate its liability based on the cause of the underlying damage, and the insurer is obligated to provide indemnity for the entire loss. ( State of California v. Underwriters at Lloyds of London (2006) 2006 WL 3823525)
Facts
The State of California selected, designed and built a Class I hazardous waste disposal facility in Riverside County (the “Stringfellow Site”). Liquid industrial waste deposited at the Stringfellow Site escaped and contaminated adjacent property as well as groundwater and a creek that flowed to a nearby community. A federal court ordered the State to remediate the contaminated property. The State sought indemnity from four of its insurers for the costs of remediation, which the State claimed exceeds $500 million.
Discovery revealed at least two potential causes of the contamination. First, industrial waste gradually and continuously escaped underground through fissures in the granite walls at the Stringfellow Site. Second, during massive rains in 1969, industrial waste combined with rain overflowed the banks at the Stringfellow Site and also escaped through a washed out dike at the Site. The State admitted that it could not differentiate the expenses it paid to remedy the property damage caused by the 1969 release of contaminants (which was covered as a “sudden and accidental” release) from the expenses it paid to remedy the property damage caused by the gradual and continuous release of contaminants through the fissures in the granite walls (which was not covered because it was not a “sudden and accidental” release).
The trial court entered summary judgment in favor of the insurers, based in part on the State’s inability to allocate damage between “covered” and “uncovered” causes. The State disagreed with the trial court and filed an appeal.
Holding
The Court of Appeal overturned the order granting summary judgment in favor of the insurers, relying on evidence that the 1969 release of contaminants might have contributed to the property damage for which the State was held liable. The Court based its ruling on the “concurrent cause” rule for third-party liability coverage cases, as established by the Supreme Court in State Farm Mutual Auto Ins. Co. v. Partridge (1973) 10 Cal.3d 94.
In Partridge , the insured altered his gun to make the trigger easier to pull. While the insured was driving his truck off-road with friends, the truck hit a bump, causing the gun to discharge and wounding one of the passengers. The Supreme Court held that the insured’s homeowner liability insurer had a duty to indemnify the insured in full for his liability since the injury was caused concurrently by an event the homeowner policy covered (i.e., the insured’s alteration of his gun) and an event the homeowner policy did not cover (i.e., the insured’s use of a vehicle). The Court interpreted Partridge as holding that liability resulting in part from a concurrent covered cause should be wholly, not partially, indemnified by an insurer.
The Court found that the 1969 release of contaminants could be a concurrent cause of the property damage for which the State was held liable. In that case, pursuant to Partridge, the insurers would have a duty to indemnify the State for all of its remediation costs even if the same damage also resulted from uncovered releases of contaminants.
In reaching its decision, the Court rejected the holdings in Golden Eagle Refinery Co. v. Associated Int’l Ins. Co. (2001) 85 Cal. App.4th 1300 and Lockheed Corp. v. Continental Ins. Co. (2005) 134 Cal. App.4th 187. In those cases, Courts of Appeal ruled that in order to trigger an insurer’s duty to indemnify, the insured bears the burden of proving which damage was caused by covered discharges of contaminants and which damage was caused by uncovered discharges of contaminants. The Court held that Golden Eagle Refinery and Lockheed were inconsistent with the Supreme Court’s decision in Partridge .
Comment
The State v. Underwriters decision has significant ramifications for environmental contamination and construction defect coverage cases, which typically involve property damage resulting from a combination of independent covered and uncovered events. Pursuant to the “concurrent cause” rule, as applied in State v. Underwriters , insureds in that situation will be entitled to indemnity for their entire property damage liability unless the insurers can trace damage to uncovered causes or uncovered policy periods.
The State v. Underwriters decision creates a clear split in appellate authority. Based on the significance of this coverage issue, the Supreme Court might review State v. Underwriters or a construction defect case to consider the “concurrent causation” doctrine and its application.
It also is important to remember that the Partridge“concurrent cause” rule is limited to third-party coverage disputes. In first-party coverage disputes, California courts have rejected the concurrent cause rule and adhere to the “predominant cause” doctrine.