A federal administrative proceeding before an administrative law judge qualified as a “suit,” thus triggering an insurer’s duty to defend under a policy that did not define the term “suit.” ( Ameron Int’l Corp. v. Ins. Co. of the State of Pa. (2010) 50 Cal.4th 1370)
Facts
In the 1970s, Ameron International Corporation (Ameron) was hired as a subcontractor to manufacture concrete siphons to be used in an aqueduct being built by the U.S. Department of the Interior’s Bureau of Reclamation (the Bureau). Many years later, the Bureau discovered defects in the siphons that required replacing them.
In 1995, the Bureau’s contracting officer issued two final decisions finding Ameron responsible for the defects and seeking almost $40 million in damages. Under the Contract Disputes Act of 1978, Ameron could have challenged the decision either by bringing an action in the U.S. Court of Federal Claims or by appealing to the U.S. Department of Interior Board of Contract Appeals (IBCA). Ameron chose the latter method.
Ameron provided timely notice of its action to eleven insurers who had issued CGL policies to Ameron from 1978 to 1995. These insurers for the most part refused to defend Ameron. The ICBA administrative law proceeding lasted twenty-two days, involved numerous witnesses and substantial evidence, and ultimately ended in a $10 million settlement.
Ameron filed suit against its insurers for breach of contract and bad faith. The trial court found in favor of the insurers, relying on Foster-Gardner, Inc. v. National Union Fire Insurance Co. (1998) 18 Cal.4th 857, in which the California Supreme Court held that an environmental agency’s pollution remediation order against an insured is not a “suit” so as to trigger a duty to defend. The California Court of Appeal affirmed the ruling as to the insurers whose policies did not define “suit.” Ameron appealed.
Holding
The California Supreme Court reversed. Reviewing the legislative history of the Contract Disputes Act and comparing the IBCA’s “complaint” requirements to those of a traditional civil complaint, the Court noted that the two types of “complaints” are subject to similar pleading requirements and serve the same purpose of informing the insurer of the nature of the dispute. Although the insured initiates the administrative proceeding, the proceeding’s purpose is to resolve the government’s claim against the insured, thus placing the insured in a defensive position like in a traditional civil action. The Court also noted that the Contract Disputes Act’s reference to “suits” would cause a reasonable policyholder to have an expectation of coverage. Thus, the Court concluded that Ameron’s quasi-judicial adjudicative proceeding qualified as a “suit” under the policies.
Comment
Ameron ’s effects will likely be limited in scope. First, the Supreme Court did not overrule Foster-Gardner ; it merely clarified that Foster-Gardner is limited to actions involving pollution remediation orders or “any other matters involving threats to take legal action only.” Second, Ameron , like Foster-Gardner , only applies to policies that do not define the term “suit.”