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State v. Allstate Insurance Co.

March 9, 2009

STATE OF CALIFORNIA, PLAINTIFF AND APPELLANT,
v.
ALLSTATE INSURANCE COMPANY ET AL., DEFENDANTS AND RESPONDENTS.
STATE OF CALIFORNIA, PLAINTIFF,
v.
UNDERWRITERS AT LLOYD'S LONDON ET AL., DEFENDANTS.



Ct.App. 4/2 E037627 Riverside County Super. Ct. Nos. RIC381555 & CIV239784 Judge: Erik Michael Kaiser.

The opinion of the court was delivered by: Werdegar, J.

This case arises from efforts by the State of California (State) to obtain insurance coverage for property damage liability imposed in a federal lawsuit as a result of discharges from the "Stringfellow Acid Pits," a State-designed and -operated hazardous waste disposal facility in Riverside County. The trial court granted summary judgment to four of the State's excess insurers, and the Court of Appeal reversed. The case presents several issues regarding application of pollution exclusions in comprehensive general liability policies: (1) In determining whether the "sudden and accidental" discharge exception to the policies' pollution exclusion applies, is the proper focus on the initial deposit of chemical wastes into storage on the site or, instead, on the escape of pollutants from the site into the larger environment? (2) Does whether an absolute exclusion for pollution of a "watercourse" applies to a 1969 overflow, in which polluted runoff ran down a creek bed, present a triable issue of fact?

(3) Does whether an emergency release of polluted runoff in 1978 was "accidental" present a triable issue of fact? (4) If triable issues exist as to whether some, but not all, discharges of pollutants from the site were sudden and accidental, did the trial court properly grant the insurers summary judgment on the ground that the State cannot prove what part of its property damage liability resulted from sudden and accidental discharges?

On these issues, we conclude: (1) Because the State's liability for property damage was founded on its negligence in allowing pollutants to escape from the Stringfellow evaporation ponds into the surrounding groundwater and land, the proper focus of analysis here is on discharges from the ponds, rather than deposits to them.

(2) A triable issue exists whether the entirety of the 1969 overflow discharge was limited to a watercourse. (3) A triable issue exists whether the 1978 release was "accidental." (4) Because a triable issue of fact exists as to whether sudden and accidental discharges were a substantial factor in causing indivisible property damage for which the State was found liable, the trial court erred in granting summary judgment on the ground that the State cannot prove how much of its liability is traceable to those discharges. Based on these conclusions, we will affirm in part and reverse in part the judgment of the Court of Appeal.

FACTUAL AND PROCEDURAL BACKGROUND

The State seeks coverage from four insurers, Allstate Insurance Company, Century Indemnity Company, Columbia Casualty Company, and Westport Insurance Corporation (collectively Insurers), for liability imposed in a federal court civil action based on discharge of hazardous wastes from the Stringfellow Acid Pits. In the federal action, the State and the United States sued companies that had disposed of waste at the Stringfellow Acid Pits, and the companies counterclaimed against the State. In 1998, the federal district court held the State 100 percent liable for claims under California law, and 65 percent liable for claims under federal law, for past and future costs of remediating contamination of land and groundwater. The State expects those remediation costs to exceed $500 million. (See United States v. Stringfellow (C.D.Cal. 1995) 1995 WL 450856, pp. *5-*6.)*fn1

Many of the undisputed facts that follow are taken from the November 1993 report of a special master in the federal case, which was adopted, with modifications, by the district court, and which was added to the summary judgment record by one of the Insurers. (United States v. Stringfellow (C.D.Cal. 1993) 1993 WL 565393;see United States v. Stringfellow, supra, 1995 WL 450856, at p. *1.)

In the 1950's, the State selected the location for and designed and directed the construction of a class I hazardous waste disposal site (i.e., one capable of accepting all types of liquid wastes) known as the Stringfellow Acid Pits. The facility, located in the Jarupa Mountains just north of the community of Glen Avon, in Riverside County, sat on the floor of a canyon drained by Pyrite Creek. In 1955, geologist Robert Fox inspected the Stringfellow site for the State. After a brief inspection that included no borings or soil analysis, Fox deemed the site suitable because of what he believed to be an impermeable layer of rock, which he assumed had no water in it, beneath the site. Fox's investigation resulted in a report concluding that with construction of a watertight barrier dam across the canyon, and with adequate measures to divert runoff, the site would pose no threat of environmental pollution.

The State directed construction of open, unlined evaporation ponds to contain the hazardous waste, channels to divert rainwater around the site, and a barrier dam at the bottom of the site. The hazardous waste disposal facility was opened in 1956. At the direction and under the control of the State, more than 30 million gallons of liquid industrial waste were deposited in the Stringfellow ponds during the facility's operation; the State closed the site to new deposits in 1972 after the discovery of groundwater contamination.

Fox's assessment of the site proved inaccurate. In fact, the site was underlain by decomposed granite and fractured bedrock, through which an underground alluvial channel ran. By 1960, a later report by a State expert found, chemical pollution was seeping into the groundwater through the fractured rock and around the ends of the barrier dam, which had been negligently constructed. A plume of contaminated groundwater moved downgradient from the site.

In addition to underground leaking, two major overflow episodes occurred at the site. In March 1969, a rainstorm of around 20 inches (statistically expected to occur no more than once every 50 years), following on earlier heavy rains in January and February, flooded the site, causing the waste ponds to overflow and send polluted water down the canyon. In March 1978, again following extraordinarily heavy rains, the ponds were once more near overflowing and the retention dam began to fail. The State made a series of controlled discharges from the ponds, releasing about one million gallons of diluted waste down the Pyrite Creek channel. (The circumstances of the 1969 and 1978 releases are discussed in greater detail in connection with the legal issues.)

The State requested coverage for the liability imposed in the federal action from several insurers, including the four involved in this appeal. All four of the pertinent comprehensive general liability polices contain coverage exclusions for liability resulting from environmental pollution. Three of the policies (all but Columbia Casualty Company's) contain a then standard exclusion, qualified by a "sudden and accidental" exception as to pollution to land or air, but absolute as to pollution to watercourses and bodies of water: "This policy does not apply: [¶]... [¶] H. To Personal Injury or Property Damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land or the atmosphere, but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental. [¶] It is further agreed that the Policy does not apply to Personal Injury or Property Damage arising out of the discharges, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon any watercourse or body of water." (Italics added.)

Columbia Casualty Company's policy combined the exclusion for pollution of land and air with that for pollution of watercourses and bodies of water, making both subject to the exception for "sudden and accidental" discharges.

Insurers denied coverage. The State then brought this action for declaratory relief, breach of contract, and bad faith denial of coverage. The trial court granted Insurers summary judgment based on their policies' pollution exclusions. The Court of Appeal reversed. As relevant here, the appellate court held that the focus in applying the pollution exclusion was properly on release of pollutants from containment on the Stringfellow site, that triable issues of fact exist as to whether the 1969 overflow of waste was "sudden and accidental" and whether it discharged pollutants onto land as well as into a watercourse, but that the undisputed facts show the 1978 release was not "accidental" because the State had been warned, after the 1969 events, that it needed to cover the ponds to avoid a reoccurrence.

Regarding the State's inability to separate out the cost of remediating sudden and accidental releases from costs attributable to the gradual seepage of pollutants from the evaporation ponds into the groundwater (the State had effectively so admitted in response to discovery requests), the Court of Appeal, relying on our decision in State Farm Mut. Auto. Ins. Co. v. Partridge (1973) 10 Cal.3d 94, held the policies covered the State's liability for indivisible damage caused partly by covered causes and partly by excluded causes. The appellate court therefore reversed the grant of summary judgment to Insurers, but ordered the superior court, on remand, to grant their alternative motion for summary adjudication of issues, establishing that the 1978 release as well as the gradual escape of pollutants were excluded events under the policies.

We granted Insurers' petitions for review, which challenged the Court of Appeal's holdings on the relevant release for application of the pollution exclusions, whether the 1969 discharge was within the watercourse pollution exclusion, and the burden of allocating costs between covered and excluded causes. The State's answer to the petitions raised the further issue of whether the Court of Appeal had correctly held the 1978 release to be nonaccidental as a matter of law.

DISCUSSION

" 'A trial court properly grants a motion for summary judgment only if no issues of triable fact appear and the moving party is entitled to judgment as a matter of law. (Code Civ. Proc., § 437c, subd. (c); see also id., § 437c, subd. (f) [summary adjudication of issues].) The moving party bears the burden of showing the court that the plaintiff "has not established, and cannot reasonably expect to establish," ' the elements of his or her cause of action. (Miller v. Department of Corrections (2005) 36 Cal.4th 446, 460.)" (Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 720.) We review the trial court's decision de novo, liberally construing the evidence in support of the party opposing summary judgment and resolving doubts concerning the evidence in favor of that party. (Yanowitz v. L'Oreal USA, Inc. (2005) 36 Cal.4th 1028, 1037.)

"Our goal in construing insurance contracts, as with contracts generally, is to give effect to the parties' mutual intentions. [Citations.] 'If contractual language is clear and explicit, it governs.' [Citations.] If the terms are ambiguous, we interpret them to protect ' "the objectively reasonable expectations of the insured." ' " (Boghos v. Certain Underwriters at Lloyd's of London (2005) 36 Cal.4th 495, 501.) The "sudden and accidental" exception to the pollution exclusion, which we construe and apply in this case, acts to reinstate coverage where it would otherwise be barred by the exclusion, and, "[a]s a coverage provision, the exception will be construed broadly in favor of the insured." (Aydin Corp. v. First State Ins. Co. (1998) 18 Cal.4th 1183, 1192.)

I. The Relevant Discharge for Application of the Pollution Exclusion

The Court of Appeal held that because the basis for the State's federal court liability was the escape into the environment of pollutants from containment ponds on the site, "the release of the wastes from the site after they had been deposited there by other entities" was "the relevant discharge for purposes of determining whether the State's discharge of pollutants was 'sudden and accidental.' " Insurers, relying on Standun, Inc. v. Fireman's Fund Ins. Co. (1998) 62 Cal.App.4th 882 (Standun), argue, to the contrary, that the relevant discharges are the "initial disposals of waste into the unlined ponds," which discharges were, of course, neither sudden nor accidental.

We agree with the Court of Appeal. The State seeks indemnity from Insurers for its liability for property damage as determined in the federal action. The policies exclude such liability if the property damage arises out of a discharge of pollutants to land, unless the discharge was "sudden and accidental." Because the issue is thus whether the discharge causing the property damage for which the State was found liable was "sudden and accidental," the focus of analysis must be on the particular discharge or discharges that gave rise to that property damage. Here the State's liability was based on its having sited, designed, built, and operated the Stringfellow facility in such a negligent manner as to allow hazardous chemicals to escape from the evaporation ponds (by both seepage and overflow) into the surrounding environment. The State was not held liable for polluting the evaporation ponds, but for polluting the land and groundwater outside the ponds.*fn2 The relevant discharges for application of the pollution exclusion, then, are those in which, due to the State's negligence, pollutants were released from the Stringfellow evaporation ponds into the surrounding soils and groundwater.

Standun is not to the contrary. The insured in that case was a manufacturer who had dumped its liquid wastes at a landfill operated by a third party. The liquid wastes were not held in containment ponds at the landfill but were deposited on the soil or mixed with solid refuse. (Standun, supra, 62 Cal.App.4th at pp. 885-886, 891.) The appellate court concluded "[t]he relevant discharge as to [the insured] is the discharge of its wastes into the landfill," not the subsequent migration of wastes from the landfill to other property. (Id. at p. 892.)

Though it reached a different result, the Standun court's approach resembles our own. As have we, the court "look[ed] first to the underlying claims to determine the polluting event." (Standun, supra, 62 Cal.App.4th at p. 890.) The underlying actions, a United States Environmental Protection Agency claim and a third party action for contribution, sought damages from the insured "arising out of [its] disposal of hazardous wastes at the... landfill." (Ibid.) Because the policyholder's liability was based on this set of discharges, ...


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