American Guarantee and Liability Insurance Co. v. Technichem, Inc.

          AMENDED ORDER ON SUMMARY JUDGMENT Re: Dkt. Nos. 123, 135

          VINCE CHHABRIA UNITED STATES DISTRICT JUDGE

         I. Commercial General Liability Policies

         The Court grants Zurich American summary judgment on the fourth claim, concerning the Commercial General Liability Policies. The plain language of the policies' Total Pollution Exclusion - which bars coverage for claims "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" - means there's no possibility that those policies apply to claims based on the alleged release of PCE. See Lewis v. Hartford Cas. Ins. Co., No. 05-cv-2969-MHP, 2006 WL 249516, at *3-5 (N.D. Cal. Jan. 31, 2006); MacKinnon v. Truck Ins. Exch., 73 P.3d 1205, 1208 n.1, 1216-17 (Cal. 2003); cf. Titan Corp. v. Aetna Cas. & Sur. Co., 27 Cal.Rptr.2d 476, 482-83 (Ct. App. 1994).

         II. Environmental Impairment Liability Policy

         The Court grants the defendants summary judgment on the first claim, concerning the Environmental Impairment Liability Policy's million-dollar liability limit. Two California regulations (which the EIL Policy incorporates by reference in Endorsement No. 1) provide that the million-dollar liability limit is "exclusive of legal defense costs." Cal. Code Regs. tit. 22, §§ 66264.147, 66265.147. These regulations apply in the event of "sudden accidental occurrences, " and it's at least possible that such "sudden accidental occurrences" are exactly what caused the release of PCE from the Technichem site. In the underlying action, DTSC has not sought to prove how and when the PCE release occurred, and the Court partially denied DTSC's motion for summary judgment because, although there was proof that PCE was released from the site, there was no proof about how or when it was released. It's certainly possible that the release was gradual or knowing - but it's also possible, at least given the current state of the record, that the release was sudden and accidental. In fact, DTSC complained that Technichem had been "stacking drums in a manner that may cause the drums to fall, rupture, or leak, " Dkt. 135-5 at 5 - in other words, a manner that might cause a sudden and accidental release of PCE. In this light, it's at least possible that sections 66264.147 and 66265.147 apply here - and "a bare 'potential' or 'possibility' of coverage" is enough to trigger Steadfast's duty to defend. Montrose Chem. Corp. v. Superior Court, 861 P.2d 1153, 1160 (Cal. 1993).

         In keeping with DTSC's agnostic stance on how the PCE release occurred, Steadfast notes that "[t]here are no allegations in any of the underlying complaints of a 'sudden accidental occurrence.'" But a duty to defend can be based on extrinsic facts, and not just the allegations in the complaint. Montrose, 861 P.2d at 1157. And though the California Court of Appeal has stated that "extrinsic facts which may create a duty to defend must be known by the insurer at the inception of the third party lawsuit, " Gunderson v. Fire Ins. Exch., 44 Cal.Rptr.2d 272, 277 (Ct. App. 1995) (emphasis in original), ^[1] Steadfast was aware of facts giving rise to a duty to defend under the EIL Policy (in general) at the inception of the underlying lawsuit. After that point, Steadfast could not end its duty to defend unless it could "establish conclusively that there is no potential for coverage." Amato v. Mercury Cas. Co., 61 Cal.Rptr.2d 909, 913 (Ct. App. 1997) (emphasis in original). To bear that burden, Steadfast would have needed to show that the EIL Policy's million-dollar liability limit had been exceeded - which, in turn, would have first required Steadfast to show that defense costs counted towards that limit (by showing that the release was not sudden or accidental).

         As a fallback position, Steadfast cites Endorsement No. 1's Condition O, which states that the insured "agree[s] to reimburse [Steadfast] . . . for any payment that we would not have been obligated to make under the provisions of the Policy except for the agreements contained in this Endorsement." But, to the extent this condition would require the defendants to count defense costs towards their million-dollar liability limit, and reimburse Steadfast for defense costs over that limit, the condition is void as contrary to the public policy embodied in the two regulations (sections 66264.147 and 66265.147) at issue.

         Separately, Steadfast argues that the EIL Policy doesn't cover the underlying DTSC action at all: Steadfast notes that the EIL Policy only covers "claims" that are made and reported during a period defined by the policy, and the DTSC action doesn't qualify. But Section VI.D.2 of the EIL Policy provides that "[t]wo or more 'claims' arising out of the same, interrelated, associated, repeated or continuous 'pollution event(s)' or a series of related 'pollution events' shall be considered a single 'claim.'" At a minimum, the DTSC action and the Pellegrini actions all arose out of interrelated pollution events, so all three actions constitute a single "claim" for purposes of the EIL Policy. And the first Pellegrini action was both filed and reported to Steadfast during the period covered by the EIL Policy. Thus, the relevant "claim" here (which includes both the DTSC action and the Pellegrini actions) was timely.^[2]

         III. Business Auto Policies

         Finally, the Court grants the defendants summary judgment on the fifth claim, concerning the potential for coverage under American Guarantee's and Zurich American's Business Auto Policies.^[3] Those policies cover "all sums an 'insured' legally must pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies, caused by an 'accident' and resulting from the ownership, maintenance or use of a covered 'auto.'" "Contamination of the environment" constitutes "property damage, " and "reimbursement of response costs and the costs of injunctive relief under CERCLA and related statutes are incurred 'because of' property damage." AIU Ins. Co. v. Superior Court, 799 P.2d 1253, 1279 (Cal. 1990). The policy's definition of "accident, " meanwhile, is broad: it "includes continuous or repeated exposure to the same conditions resulting in 'bodily injury' or 'property damage.'" In light of these two definitions, the release of PCE at the Technichem site is an "accident" that caused "property damage." And, based on the allegations in the underlying complaint, there's a non-speculative possibility that the "accident" at the Technichem site resulted from the "use" of a covered auto. Under California law, "use" of an automobile includes loading and unloading. Cal. Ins. Code § 11580.06(g); Encompass Ins. Co. v. Coast Nat'l Ins. Co., 764 F.3d 981, 984-87 (9th Cir. 2014). The underlying complaint alleges that "Technichem transported hazardous substances to the Technichem facility, " where "hazardous substances were released to the environment." Based on these allegations, it's easy to conceive of a theory under which, for example, PCE was spilled while being unloaded from covered automobiles that transported it to the Technichem site. And an insurer has a duty to defend unless "the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage." Montrose, 861 P.2d at 1160 (emphasis in original).

         Extrinsic evidence - while not independently necessary to establish a duty to defend under the Business Auto Policies - confirms that this theory was more than speculation. Cf. Gunderson, 44 Cal.Rptr.2d at 277-78. In fact, there's evidence that some or all of the PCE released at the Technichem site really was spilled while being unloaded from vehicles. Test results "suggest that a release of [PCE] likely occurred near the loading dock, " Dkt. No. 135-6 at 9 - a location "where trucks deliver and offload drums and containers of solvents, " which could be expected to cause "some spillage of PCE, " Dkt. No. 135-9 at 5.

         IV. Next Steps

         As discussed at the June 21, 2016 case management conference, this case is stayed pending resolution of the underlying ...