AIU Ins. Co. v. Superior Court

Decision Date15 November 1990
Docket NumberNo. S012525,S012525
Citation274 Cal.Rptr. 820,51 Cal.3d 807,799 P.2d 1253
CourtCalifornia Supreme Court
Parties, 799 P.2d 1253, 32 ERC 1257, 59 USLW 2349, 21 Envtl. L. Rep. 20,315 AIU INSURANCE COMPANY et al., Petitioners, v. The SUPERIOR COURT of Santa Clara County, Respondent; FMC CORPORATION, Real Party in Interest.

Buchalter, Nemer, Fields & Younger, Robert A. Zeavin, Deborah A. Pitts, Victor C. Rabinowitz, Randolph P. Sinnott, Los Angeles, Morrison & Foerster, Marc P. Fairman, Michael M. Carlson, Annette P. Carnegie and Elizabeth J. Kuczynski, San Francisco, for petitioners.

Thomas W. Brunner, Washington, D.C., as amicus curiae on behalf of petitioners.

No appearance for respondent.

Hill, Wynne, Troop & Meisinger, David W. Steuber, Los Angeles, and Eugene R. Anderson for real party in interest.

Freilich, Stone, Leitner & Carlisle, Benjamin Kaufman, Los Angeles, Heller, Ehrman, White & McAuliffe, Barry S. Levin, San Francisco, Robert T. Haslam, Palo Alto, Celia M. Jackson, San Francisco, Covington & Burling, Robert N. Sayler, William F. Greaney, Washington, D.C., Folger & Levin, San Francisco, Michael A. Kahn, Beverly Hills, Gregory D. Call, Lasky, Haas, Cohler & Munter, Moses Lasky, John E. Munter, Scott P. DeVries, San Francisco, and William L. Berry, Jr., Sacramento, as amici curiae on behalf of real party in interest.

LUCAS, Chief Justice.

We are called on to decide whether, under comprehensive general liability (CGL) insurance policies issued by petitioners (insurers) to real party in interest FMC Corporation (FMC), insurers are obligated to provide coverage to FMC for cleanup and other "response" costs incurredpursuant to the Comprehensive Environmental Response and Compensation and Liability Act (CERCLA) (42 U.S.C. § 9601 et seq.) and related state and federal environmental laws. FMC seeks review of the peremptory writ of mandate issued by the Court of Appeal, which directed the superior court to enter summary adjudication on this issue in favor of the insurers.

We reverse the decision of the Court of Appeal. The insurance policies at issue provide coverage to FMC for all sums FMC becomes legally obligated to pay as "damages" (under two policy forms) or "ultimate net loss" (under a third) because of property damage. Under established principles of contract interpretation, we construe policy language according to the mutual intentions of the parties and its "plain and ordinary" meaning, resolving ambiguities in favor of coverage. Applying these rules, we conclude that the policies cover the costs of reimbursing government agencies and complying with injunctions ordering cleanup under CERCLA and similar statutes. Although many of the policies contain exclusions arguably relevant to whether environmental cleanup costs are covered, we do not consider the applicability of exclusions in this case, which comes to us on motion for summary adjudication solely as to the coverage clauses. (See post, pp. 827-828 of 274 Cal.Rptr., pp. 1260-1261 of 799 P.2d.)


FMC holds over 60 primary and excess CGL policies issued by the insurers. Each policy contains one of three coverage clauses:

1. Policies issued by the Liberty Mutual Insurance Company and others provide coverage to FMC for "all sums which [FMC] shall become legally obligated to pay as damages because of ... property damage to which this policy applies."

2. Policies issued by the FMC Insurance Company and others provide coverage to FMC for "all sums which [FMC] shall become obligated to pay by reason of the liability ... imposed upon [FMC] by law ... for damages on account of ... property damage...." 1

3. Policies issued by the First State Insurance Company and others provide coverage to FMC for "all sums which [FMC] shall be obligated to pay by reason of the liability ... imposed upon [FMC] by law ... for damages, direct or consequential and expenses, all as more fully defined by the term 'ultimate net loss' on account of ... property damages...." 2

These coverage provisions were adopted verbatim from standard CGL policies used by the insurance industry. (See Mountainspring, Insurance Coverage of CERCLA Response Costs: The Limits of "Damages" in Comprehensive General Liability Policies (1989) 16 Ecology L.Q. 755, 759; Chesler et al., Patterns of Judicial Interpretation of Insurance Coverage for Hazardous Waste Site Liability (1986) 18 Rutgers L.J. 9, 53.) They contain several common elements. Each provision covers only sums that FMC is "legally obligated" or "obligated ... by law" to pay. They each require that the sums paid be the result of FMC's liability for "property damage[s]." The first two policies limit coverage to sums paid as or for "damages." None of these terms is defined in any of the policies. 3 The only relevant definition contained in any of the policies is of "ultimate net loss" (covered by the third policy), which includes both "damages" and "expenses." (See ante, fn. 2.)


The United States and local administrative agencies (hereafter agencies) filed suits against FMC, seeking relief for alleged violations of CERCLA, the Resource Conservation and Recovery Act (RCRA) (42 U.S.C. § 6901 et seq.), the Clean Water Act (33 U.S.C. § 1251 et seq.), the Safe Drinking Water Act (42 U.S.C. § 300f et seq.), and California's Hazardous Substance Account Act (Health & Saf.Code, § 25300 et seq.). In sum, the suits allege that FMC is responsible for the contamination of 79 different hazardous waste disposal sites, groundwater beneath the sites, aquifers beneath adjoining property, and surrounding surface waters. The agencies seek two types of relief: (i) injunctions compelling FMC both to terminate disposal of further hazardous waste and to remove contaminants already present on and around the disposal sites, and (ii) reimbursement of their costs of investigating, monitoring, and initiating cleanup of hazardous waste for which FMC allegedly is responsible.

All of the statutes on which the third party suits are based expressly authorize injunctive relief. (See CERCLA, 42 U.S.C. § 9606(a); RCRA, 42 U.S.C. § 6973(a); Clean Water Act, 33 U.S.C. § 1364(a); Safe Drinking Water Act, 42 U.S.C. § 300i(a); Hazardous Substance Account Act, Health & Saf.Code, § 25358.3, subd. (a).) CERCLA and the Hazardous Substance Account Act, however, also authorize government recovery of the costs of removing hazardous waste and restoring affected property, providing the agencies with a choice (subject to judicial approval) of how to proceed with and finance cleanup efforts. (See CERCLA, 42 U.S.C. § 9607(a)(4)(A) [reimbursement of government costs of removal or remedial action]; Hazardous Substance Account Act, Health & Saf.Code, § 25360 [reimbursement of state cleanup expenses.].) In addition, CERCLA authorizes the federal government to recover sums for "damages to natural resources." (42 U.S.C., § 9607(a)(4)(C).) In their present suits against FMC, however, the agencies do not seek recovery under this last provision, although surface and groundwater nominally owned by the state (Wat.Code, § 102) has been damaged at many of the sites where remedial action is sought, and although CERCLA defines "natural resources" to include water and groundwater "belonging to, managed by, held in trust by, appertaining to, or otherwise controlled by" the federal or state government. 4 (See CERCLA, 42 U.S.C. § 9601(16).)


In the present suit, FMC seeks declaratory relief establishing that the CGL policies cover costs it may become obligated to pay as a result of injunctive relief and/or reimbursement ordered in the third party suits. The insurers moved for summary adjudication, asserting that, as a matter of law, the CGL policies do not cover costs of abating and cleaning up hazardous waste and reimbursing governmental agencies for their cleanup efforts. 5 In response, FMC contended that (i) the policy language encompasses all of its costs resulting from the agencies' suits under CERCLA and the other statutes, (ii) the intent of the parties to the policies is a relevant and contested issue of material fact bearing on the issue of coverage, and (iii) FMC should be granted preliminary discovery of evidence bearing on such intent.

The superior court denied the insurers' motion for summary adjudication and granted FMC preliminary discovery. Contrary to the insurers' contentions, the court reasoned that CGL policy language should be construed broadly and nontechnically, as ordinary principles of insurance policy interpretation direct. In this light, environmental cleanup costs, whether incurred directly by FMC pursuant to injunction or reimbursed to the government agencies, constitute "damages" and "ultimate net loss" which FMC will be "legally obligated" to pay because of "property damage." The court concluded it was immaterial that in strict legal terms FMC's obligation to incur costs pursuant to injunction will arise from the federal courts' exercise of "equitable" rather than "legal" authority, or that its reimbursement of government expenses can arguably be considered "restitution" rather than "damages."

The Court of Appeal reversed, issuing a peremptory writ of mandate directing the superior court to vacate its order denying summary adjudication of issues, and to enter in its place a new order granting such motion. Adhering to the position taken by two federal Courts of Appeals (Continental Ins. v. Northeastern Pharmaceutical (8th Cir.1988) 842 F.2d 977, cert. den. 488 U.S. 821, 109 S.Ct. 66, 102 L.Ed.2d 43 (hereafter NEPACCO ); Maryland Cas. Co. v. Armco, Inc. (4th Cir.1987) 822 F.2d 1348, cert. den. 484 U.S. 1008, 108 S.Ct. 703, 98 L.Ed.2d 654 (hereafter Armco )), the court held that public policy considerations demand that the CGL policies be read technically, precluding coverage of the cost of "prophylactic" measures ordered under the equity...

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