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Federal Insurance Company v. MBL, Inc.

California Court of Appeals, Sixth District

August 26, 2013

FEDERAL INSURANCE COMPANY et al., Plaintiffs, Cross-defendants, and Respondents,
v.
MBL, INC., Defendant, Cross-complainant and Appellant. GREAT AMERICAN INSURANCE COMPANY, Plaintiff, Cross-defendant, and Appellant,
v.
FEDERAL INSURANCE COMPANY et al., Defendants, Cross-complainants and Respondents.

Santa Clara County Superior Court Nos. CV114309, CV119165 Trial Judge: Hon. Mark H. Pierce

Counsel for Defendant/Appellant: MBL, Inc., Case No. H036296, Hamrick & Evans, A. Raymond Hamrick III, James M. Pazos, Kenneth A. Kotarski.

Counsel for Plaintiff/Respondent: Nationwide Indemnity Co., Case No. H036296, Barber Law Group, Bryan M. Barber, Steven D. Meier.

Counsel for Plaintiff/Respondent: Federal Insurance Co. and Utica Mutual Insurance Co. Case No. H036296, Chamberlin Keaster & Brockman, Kirk C. Chamberlin, Elizabeth M. Brockman.

Counsel for Plaintiff/Cross-defendant/Respondent: Great American Insurance Company Case No. H036296, Duane Morris, Paul J. Killion, Dominica C. Anderson, Michael J. Dickman.

Counsel for Plaintiff/Appellant: Great American Insurance Co. Case No. H036578, Duane Morris, Paul J. Killion, Dominica C. Anderson, Michael J. Dickman.

Counsel for Defendant/Respondent: Nationwide Indemnity Co., Case No. H036578, Barber Law Group, Bryan M. Barber, Steven D. Meier.

Counsel for Defendant/Respondent: Federal Insurance Co. and Utica Mutual Insurance Co. Case No. H036578, Chamberlin Keaster & Brockman, Kirk C. Chamberlin, Elizabeth M. Brockman.

Premo, J.

After soil and groundwater contamination in the City of Modesto was traced back to a dry cleaning facility known as Halford’s Cleaner’s (Halford’s), the federal government brought a Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) action against the owners of the property on which Halford’s was located, as well as the lessees who owned and/or operated the facility, to recover the costs of monitoring and remediating the contamination.[1] The defendants in the Lyon action subsequently filed third-party actions against, among others, appellant MBL, Inc. (MBL), a supplier of dry cleaning products including perchloroethylene (PCE), seeking indemnity, contribution and declaratory relief.

MBL tendered the defense of these third-party actions to its insurers, Federal Insurance Company (Federal), Centennial Insurance Company (Centennial), Atlantic Mutual Insurance Company (Atlantic), Nationwide Indemnity Company (Nationwide), Utica Mutual Insurance Company (Utica) and Great American Insurance Company (Great American) (hereafter collectively referred to as Insurers). The Insurers accepted the tender of defense, subject to reservations of various rights, and retained counsel to provide MBL with a defense. MBL refused to accept retained counsel, arguing the Insurers’ reservations of rights created a conflict of interest and demanding the Insurers instead pay for counsel of MBL’s choosing. The Insurers denied there was any such conflict of interest and filed declaratory relief actions. The trial court granted summary judgment in favor of the Insurers, finding there was no actual conflict of interest. On appeal, MBL contends the trial court erred in finding the Insurers were entitled to declaratory relief. We shall affirm.

In a related appeal, Great American seeks to preserve its right to equitable contribution from the other Insurers in the event MBL’s appeal is successful. Alone among the Insurers, Great American paid MBL’s independent counsel for the costs of defending the third-party actions, subject to a reservation of the right to reimbursement from MBL if it succeeded in its declaratory relief action. Since we are affirming the judgments in favor of the Insurers on the question of MBL’s right to independent counsel--thus confirming that none of the Insurers, Great American included, was obligated to pay such counsel--Great American’s appeal is moot and shall be dismissed.

I. Factual and Procedural Background

MBL supplies PCE, and other dry cleaning products, to dry cleaning facilities, and has done so for a number of years. In 2007, MBL was named as a defendant in a number of third-party complaints and cross-complaints filed in the Lyon action. According to the allegations of the Lyon action, wastewater containing PCE was discharged into the sewer system as part of Halford’s dry cleaning operations until the mid-1980s. PCE was also leaking from an old dry cleaning machine through the floor of the facility into the soil and groundwater. In 1989, the site was placed on the National Priorities List of hazardous waste sites.

Clean up activities at the site, which are ongoing, began in 2000 when the EPA installed a groundwater treatment system and a soil vapor extraction system at the property.

The third-party complaints and cross-complaints alleged that MBL, among others: (1) purchased and resold chlorinated solvents to Halford’s; (2) distributed, designed, assembled, maintained, controlled, operated and/or repaired parts of Halford’s equipment; (3) engaged in service visits and inspections on Halford’s premises, including testing and inspecting Halford’s equipment and witnessing Halford’s disposal of chlorinated solvents; (4) was legally responsible for and committed tortious acts; and, (5) in doing so acted as a coconspirator, aider, abettor, fraudulent transferee and fraudulent transferor of the other third-party defendants. The complaints sought contribution, equitable indemnity and declaratory relief from MBL.

MBL filed a cross-claim in the Lyon action which named as cross-defendants, among others, the City of Modesto, McGraw Edison Company and Bowe Permac, Inc.

MBL retained defense counsel, who tendered the defense of the Lyon action to the Insurers, requesting they appoint Cumis[2] counsel. The Insurers accepted the tender of defense subject to various reservations of rights, detailed below, and appointed counsel to defend MBL. MBL refused to allow the Insurers’ appointed counsel to associate as defense counsel, asserting it was entitled to independent counsel of its own choosing pursuant to Civil Code section 2860.[3] The Insurers advised MBL it was only entitled to Cumis counsel if their reservations of rights created a conflict of interest and, with the exception of Great American, refused to pay the defense costs incurred by MBL’s counsel.[4]

A. Great Americans policies

Great American issued primary general liability insurance policies to MBL with policy periods from November 1, 1980 to November 1, 1983 (policy No. BP 2180454), November 1, 1983 to November 1, 1984 (policy No. BP 6272405-00) and November 1, 1984 to November 1, 1985 (policy No. BP 6272405-01).

Each of the Great American policies contained the following language regarding the duty to defend: “The company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient, but the company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the company’s liability has been exhausted by payment of judgments settlements.”

Great American’s reservations of rights explained that it “reserves its rights to decline coverage for any damages resulting from an occurrence outside of Great American’s policy period, ” and that “Great American’s duty to indemnify, if any, shall not exceed the remaining available limits under the policies at issue.” Great American also stated that “[t]o the extent that punitive damages are awarded against MBL, such damages would not be covered, ” and “Great American reserves the right to seek reallocation and/or reimbursement pursuant to Buss v. Superior Court (1997) 16 Cal.4th 35.”

B. Nationwides policies and reservation of rights

Nationwide issued three liability policies to MBL which covered the period from November 1, 1991 to November 1, 1994. These policies contained the following language relating to Nationwide’s duty to defend: “We will have the right and duty to defend any ‘suit’ seeking [damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies]. We may at our discretion investigate any ‘occurrence’ and settle any claim or ‘suit’ that may result.” The policies also provide that “[t]his insurance applies to ‘bodily injury’ and ‘property damage’ only if: [¶]... (2) The ‘bodily injury’ or ‘property damage’ occurs during the policy period.”

Each of the Nationwide policies also contains pollution exclusions. The 1992 to 1993 policies exclude coverage for: “(1) ‘Bodily injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants: [¶]... [¶] (b) At or from any premises, site or location which is or was at any time used by or for any insured or others for the handling, storage, disposal, processing or treatment of waste. [¶] (c) Which are or were at any time transported, handled, stored, treated, disposed of, or processed as waste by or for any insured or any person or organization for whom you may be legally responsible; [¶]... [¶] (2) Any loss, cost or expense arising out of any: (a) Request, demand or order that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants; or (b) Claim or suit by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of pollutants.”

The 1993-1994 policy excludes coverage for bodily injury or property damage “which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time”; losses or expenses arising out of any “request, demand or order that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants”; and losses or expenses arising out of a “[c]laim or suit by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of pollutants.”

Nationwide accepted MBL’s tender of defense subject to a reservation of its rights, as follows: (1) to deny coverage for property damage that did not occur during the applicable policy periods (i.e., between November 1, 1991 and November 1, 1994); (2) to deny coverage for fines or penalties that are not “damages” as defined by the policies; (3) to deny coverage under the absolute pollution exclusions in the policies; and (4) to seek reimbursement of defense costs if it is determined Nationwide had no duty to defend the claim.

C. Federal and Utica policies and reservations of rights

Federal issued a liability policy to MBL with an effective date of November 1, 1978 through November 1, 1980 (policy No. MP 3514 26 76). The liability policy issued by Utica to MBL had an effective date of November 1, 1976 through November 1, 1979 (policy No. 2955).

The insuring agreement set forth in the Utica policy provides: “The Company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies, caused by an occurrence, and the Company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false, or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient, but the Company shall not be obligated to pay ...


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