Hydro Systems, Inc. v. Continental Ins. Co., 89-55953

• Decision Date: 25 March 1991
• Docket Number: No. 89-55953,89-55953
• Parties: , 59 USLW 2648, 21 Envtl. L. Rep. 20,702 HYDRO SYSTEMS, INC., Plaintiff-Appellant, v. CONTINENTAL INSURANCE COMPANY, a New Jersey Corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 472

929 F.2d 472

32 ERC 2043, 59 USLW 2648, 21 Envtl.

L. Rep. 20,702

HYDRO SYSTEMS, INC., Plaintiff-Appellant, v. CONTINENTAL INSURANCE COMPANY, a New Jersey Corporation,

Defendant-Appellee.

No. 89-55953.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 6, 1990.

Decided March 25, 1991.

Arthur Fine, Mitchell, Silverberg & Knupp, Los Angeles, Cal., for plaintiff-appellant.

Jeffrey S. Barron, Robert S. Wolfe, Michael T. Colliau and Douglas J. Collodel Appeal from the United States District Court for the Central District of California.

Morris, Polich & Purdy, Los Angeles, Cal., for defendant-appellee.

Before HUG, CANBY and WIGGINS, Circuit Judges.

WIGGINS, Circuit Judge:

Hydro Systems, Inc. appeals the district court's grant of summary judgment against it in its action for breach of an insurance contract and breach of the covenant of good faith and fair dealing. This court has diversity jurisdiction over the appellant's timely appeal. 28 U.S.C. Sec. 1332. We affirm the judgment of the district court.

BACKGROUND

Appellant Hydro Systems, Inc. ("Hydro") manufactures fiberglass bathtubs at a plant located in Simi Valley, California. The manufacturing process involves three raw materials: fiberglass, gel coat and resin. Gel Coat and resin are chemical compounds consisting, in part, of a hydrocarbon known as styrene. During Hydro's manufacturing process, gaseous styrene is liberated from the gel coat and resin and dispersed into the air through exhaust fans and stacks.

During the spring and summer of 1988, residents of a Simi Valley neighborhood (the "Greek Tract") made complaints about the odors connected with the styrene emissions from Hydro's plant. The complaints were made to Simi Valley officials and the Ventura County Air Pollution Control District.

On April 15, 1988, the City of Simi Valley Community Services Department, Code Enforcement Division, notified Hydro that the odors and fumes emanating from the plant constituted a violation of the municipal code. The City threatened action to obtain compliance with the code if Hydro failed to act independently. In June and July of 1988, the City's planning commission held hearings to decide whether to suspend, modify, or revoke Hydro's initial proposal to increase the height of exhaust stacks above its plant. On July 15, 1988, the planning commission issued an order immediately suspending Hydro's use of styrene and revoking its operating permit for 90 days.

Hydro appealed the commission's order to the City Council and instituted an action in state court. In July, 1988, Greek Tract residents intervened in the action, filing a complaint contending that Hydro's styrene emissions were causing them bodily injury and property damage. These intervenors, however, did not seek monetary damages for past or present losses, praying only for denial of the relief requested by Hydro as well as seeking costs of suit and attorney's fees. In the state court action, Hydro obtained a temporary restraining order and preliminary injunction restraining enforcement of the commission's order pending Hydro's appeal to the City Council.

On August 17, 1988, the City Council denied Hydro's appeal but allowed it to operate on a reduced schedule until October 25, 1988, while it attempted to ameliorate odors from the facility. In response, Hydro installed a carbon absorption air pollution control system to neutralize the styrene vapors.

Throughout the time period in question, Hydro was the holder of a general commercial liability insurance policy issued by Continental Insurance Co. ("Continental"). In response to the events of 1988, Hydro sought coverage under the policy for the defense of the city's actions and for reimbursement of the cost of complying with the city's orders. By denial letter dated August 25, 1988, Continental concluded that Hydro's claims were not covered under the policy. This suit followed.

The district court granted Continental's motion for summary judgment, holding that Hydro's claims were unambiguously barred by the policy's terms and that Hydro's assertions of a breach of the implied covenant of good faith and fair dealing were therefore precluded. Hydro Systems, Inc. v. Continental Ins. Co., 717 F.Supp. 700 (C.D.Cal.1989).

DISCUSSION

A grant of summary judgment is reviewed de novo. Kruso v. International Telephone & Telegraph Corp., 872 F.2d 1416, 1421 (9th Cir.1989), cert denied, --- U.S. ----, 110 S.Ct. 3217, 110 L.Ed.2d 664 (1990). The appellate court must determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact and whether the district court correctly applied the law. Tzung v. State Farm Fire and Casualty Co., 873 F.2d 1338, 1339-40 (9th Cir.1989). There are no federal issues in this diversity action and California law controls the determination.

A. Pollution Exclusion Clause

The insurance policy issued by Continental and held by Hydro (the "policy") is a general commercial liability policy covering "those sums that [Hydro] becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' ..." The policy has several exclusions, one of which is a pollution exclusion clause which reads:

This insurance does not apply to: (1) 'bodily injury', 'property damage' or injury or damage of any nature or kind to persons or property arising out of the actual, alleged or threatened emission, discharge, dispersal, seepage, release or escape of 'pollutants'; (2) any loss, cost or expense incurred as a result of any 'clean-up' of 'pollutants'; or (3) the investigation, settlement or defense of any claim, 'suit' or proceeding against the insured, including any payments, cost or expenses associated therewith, alleging such injury, damage, loss cost or expense as described in (1) and (2) above.

[Definitions]

'Pollutants' is amended to mean any noise, solid, semisolid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, mists, acids, alkalis, chemicals, biological and other etiologic agents or materials, ... 'waste' and any other irritant or contaminant.

Hydro does not deny on appeal that its emissions of styrene gas fall within this main provision of the pollution exclusion clause. Hydro's claim clearly involves the "emission" of a "pollutant" as defined above.

Instead, Hydro argues that its styrene emissions are within the "products-completed operations hazard" exception (the "PCOH") to the pollution exclusion clause. It provides:

However, this [pollution] exclusion does not apply to: (1) the 'products-completed operations hazard'

. . . . .

[Definitions]

'Products-completed operations hazard' includes all 'bodily injury' and 'property damage' occurring away from premises you own or rent and arising out of 'your product' or 'your work' except: (1) Products that are still in your physical possession; or (2) Work that has not yet been completed or abandoned.

'Your product' means: a. Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by: (1) You; (2) Others trading under your name; or (3) A person or organization whose business or assets you have acquired; ...

'Your work' means: a. Work or operations performed by you or on your behalf; and b. Materials, parts or equipment furnished in connection with such work or operations ...

Whether Hydro's styrene emissions are covered by the policy's PCOH exception depends on the interpretation of the 'your product' and 'your work' definitions. Hydro correctly observes that standard insurance policies are contracts of adhesion, Globe Indem. Co. v. State of California, 43 Cal.App.3d 745, 750, 118 Cal.Rptr. 75, 78 (1974), which when ambiguous should be "construed against the insurer and in favor of the insured." Commercial Union Ins. Co. v. Sponholz, 866 F.2d 1162, 1163 (9th Cir.1989); see also Reserve Ins. Co. v. Pisciotta, 30 Cal.3d 800, 807, 180 Cal.Rptr. 628, 632, 640 P.2d 764, 768 (1982). Hydro argues that the policy's PCOH definitions Hydro contends that styrene is a product under the policy's definition. Several courts have examined the meaning of the term "product" as it relates to product hazard exceptions. The majority of courts "define 'products' as goods or services which the insured deals in as his stock or trade." CPS Chem. Co. Inc. v. Continental Ins. Co., 199 N.J.Super. 558, 489 A.2d 1265, 1270 (L.1984) (holding that "industrial wastes" were not products under a products hazard exception because they were "not intended for consumption, sale, or use by others ..."); see also Paxton-Mitchell Co. v. Royal Indemn. Co., 279 Or. 607, 569 P.2d 581, 587 (1977) (interpreting 'product' in the absence of a contractual definition as referring to those things in which the insured "trades or deals").

are sufficiently broad and ambiguous to be read in its favor.

This common sense definition of the term "product" leads to the conclusion that styrene gas is not one of Hydro's products. Styrene is liberated in the manufacturing process of Hydro's true finished good, fiberglass bathtubs. Hydro has never marketed styrene, nor has it made any attempt to contain it for future use or distribution. The styrene was purposely vented into the atmosphere. We do not believe that the term 'product' as used in the PCOH exception is ambiguous.

However, Hydro argues that the policy's definition of product incorporates styrene because of the term "disposed of". Hydro asserts that since styrene is disposed of, it is a product and therefore within the PCOH. It is true that the policies examined by other courts generally do not contain this term. However, its inclusion in the instant policy should not detract from the generally understood meaning of the term "product". Whether or not Hydro disposes of styrene, the gas is simply not a good or product as these terms are generally understood.

A more compelling argument...