Advisories & Insights

Under a recent California Supreme Court decision, Powerine Oil Company v. Superior Court (2005) 33 Cal.Rptr. 562, some umbrella carriers may be on the hook for administratively ordered environmental clean-up expenses.

Powerine Oil Company, a Southern California refinery operator, contaminated soil and groundwater. The regional water authorities for Los Angeles and San Diego ordered Powerine to clean up the contamination, and Powerine in turn asked its insurers to cover the costs. The insurers refused and sought declaratory relief. In 2001, the Supreme Court held that Powerine's primary insurers were not liable for the cleanup costs, because their policy covered only "damages," which the court interpreted not to include costs imposed by a regional water board. Certain Underwriters at Lloyd's of London v. Superior Court (Powerine Oil Company), (2001) 24 Cal. 4th 945.

Now, in a sequel to that decision ("Powerine II"), the court has found coverage for the cleanup costs under some of Powerine's umbrella policies. Those policies expressly covered both damages and "expenses" resulting in an "ultimate net loss." Such language, the court held, extends beyond money ordered by a court. It is "broad enough to include coverage for the liability of environmental clean-up and response costs ordered by an administrative agency."

The Court noted that in Powerine I, "we ourselves used the term ‘expenses' when explaining that ‘expenses required by an administrative agency pursuant to an environmental statute, whether for the cleanup of a contaminated site and the abatement of the contamination's effects or otherwise, do not constitute money ordered by a court.'.... Surely then, an insured would harbor an objectively reasonable expectation that these policies also afforded coverage for such expenses, something above and beyond court-ordered ‘damages.'"

The Court rejected Central National's argument that finding coverage would render the term "damages" in the policy redundant. The Court said that, "the term ‘damages' in these policies serves the same purpose that it does in the standard primary CGL policy—it extends the indemnity obligation to ‘money ordered by a court' in a suit against the insured. Were the term not included in the policy language, the insurer could be heard to argue that coverage is not provided for court-ordered money judgments."

However, in a companion case decided by the Court the same day as Powerine, the Supreme Court reached a very different conclusion based on slightly different policy language. In County of San Diego v. Ace Property & Casualty Insurance Company (2005) 37 Cal.4th 406, the Court held that the term "damages" in a non-standard excess liability policy issued to San Diego County had the same limiting effect as in a standard CGL Policy. The "central insuring provision" in the policy issued by Ace Property & Casualty Company "likewise obligates Ace to Indemnity the County for all sums the insured becomes obligated to pay by reason of liability imposed by law for ‘damages' resulting from the destruction or loss of use of tangible property." The Court held that the County's remediation costs and expenses were not damages and thus not covered under the policy.

The opposite rulings in Powerine II and County of San Diego show that seemingly minor differences in policy language can dramatically affect whether coverage is available for large environmental losses.