The California Court of Appeal has held that (1) a general liability policy which was issued to an insured in Texas but which was to be performed in California should be interpreted under the laws of California, and (2) interpreting the policy under California law, the insured was entitled to a defense from the insurer. ( Frontier Oil Corporation v. RLI Insurance Company (2007) 63 Cal.Rptr.3d 816)
Facts
The predecessor of Frontier Oil Corporation (Frontier) was an oil and gas company based in Texas with some operations in California. Frontier purchased a general liability policy from a Texas insurer which was later acquired by RLI Insurance Company (RLI).
The policy’s main coverage form provided that RLI would indemnify and defend Frontier against suits alleging bodily injury or property damage, but contained an “absolute” pollution exclusion. However, the policy also contained a “pollution liability endorsement” which deleted the absolute pollution exclusion and added indemnity coverage for damages arising from “sudden and accidental” releases of pollutants, without mentioning whether there was a duty to defend suits seeking such damages. The policy included a “Texas Changes” endorsement which made the policy conform to Texas law regarding notice of claims, policy cancellation and policy renewal. The policy also included some endorsements listing various California public entities as “additional insureds” with respect to Frontier’s oil operations in Beverly Hills, California.
Between 2003 and 2005, various plaintiffs sued Frontier in California. The plaintiffs alleged that Frontier’s oil operations in Beverly Hills had caused “releases, discharges, fugitive emissions, leaks and spills” of toxic chemicals into the environment and that this had resulted in personal injuries and deaths. Frontier tendered these lawsuits to RLI, but RLI declined to defend Frontier.
Frontier then filed a declaratory relief/bad faith action against RLI in California state court. The trial court ruled that Texas law governed the dispute and that, under Texas law, the pollution liability endorsement provided for indemnity against sudden and accidental releases of pollutants but did not provide for a defense against suits seeking such damages. The trial court thus ruled that RLI had no duty to defend Frontier in the underlying lawsuits. Frontier appealed.
Holding
The Court of Appeal reversed, holding that RLI was obligated to defend Frontier in the underlying lawsuits.
The Court reasoned that under California Civil Code section 1646, a contract is to be interpreted according to the law of the place it is to be performed if the contract “indicate[s] a place of performance,” and according to the law of the place it was made if the contract “does not indicate a place of performance.” The Court then concluded that for purposes of section 1646, a contract “indicate[s] a place of performance” if the contract expressly specifies a place of performance or if the intended place of performance can be gleaned from the nature of the contract and its surrounding circumstances. The Court concluded that since California was the location of the risk insured under the policy, California was the state where the parties intended that RLI would be obligated to perform its defense obligations under the policy. Thus, California law—not Texas law—governed interpretation of the policy.
The Court, interpreting the policy under California law, then held that the RLI policy included a duty to defend Frontier against suits seeking damages arising from “sudden and accidental” releases of pollutants. The Court reasoned that the policy’s pollution liability endorsement did not clearly and unmistakably exclude pollution claims from the duty to defend stated in the main coverage form, and therefore the pollution liability endorsement did not exclude pollution claims from the contractual duty to defend. Since the plaintiffs in the underlying actions were seeking damages from Frontier as a result “sudden and accidental” releases of pollutants covered by the policy’s pollution liability endorsement, RLI had a duty to defend.
Comment
This case presented a “choice-of-law” problem, which can arise when a legal dispute has connections with more than one state. In this case, the Court emphasized that California was the location of the risk insured under the policy, and thus California was where the parties understood the insurer would have to perform its defense obligation. The Court held that under these circumstances the policy impliedly “indicate[d] a place of performance,” and therefore pursuant to California Civil Code section 1646 California law should govern issues of policy interpretation.