Aydin Corp. v. First State Ins. Co.

• Decision Date: 20 August 1998
• Docket Number: No. S061699,S061699
• Citation: 77 Cal.Rptr.2d 537,959 P.2d 1213,18 Cal.4th 1183
• Court: California Supreme Court
• Parties: , 959 P.2d 1213, 47 ERC 1193, 98 Cal. Daily Op. Serv. 6494, 98 Daily Journal D.A.R. 5961 AYDIN CORPORATION, Plaintiff and Respondent, v. FIRST STATE INSURANCE COMPANY, Defendant and Appellant

Page 537

77 Cal.Rptr.2d 537

18 Cal.4th 1183, 959 P.2d 1213, 47 ERC 1193,

98 Cal. Daily Op. Serv. 6494,

98 Daily Journal D.A.R. 5961

AYDIN CORPORATION, Plaintiff and Respondent, v. FIRST STATE INSURANCE COMPANY, Defendant and Appellant.

No. S061699.

Supreme Court of California

Aug. 20, 1998.

As Modified on Denial of Rehearing Oct. 14, 1998. ^*

Crosby, Heafey, Roach & May, James C. Martin, Joseph P. Mascovich, Boyd C. Sleeth, Oakland, Melito & Adolfsen, Siff Rosen and Louis G. Adolfsen, New York City, for Defendant and Appellant.

Wiley, Rein & Fielding, Laura A. Foggan, Daniel E. Troy, Craig S. Lerner, Washington D.C., Bien & Summers, Elliot L. Bien, Novato, Hancock, Rothert & Bunshoft and William J. Baron, San Francisco, as Amici Curiae on behalf of Defendant and Appellant.

Brobeck, Phleger & Harrison, Donald W. Brown, David E. Weiss and Edith M. Hofmeister, San Francisco, for Plaintiff and Respondent.

Troop, Meisinger, Steuber & Pasich, Martin D. Katz, Lauri S. Konishi, Los Angeles, Latham & Watkins, David L. Mulliken, Dorn G. Bishop, Julia E. Parry, San Diego, Heller, Ehrman, White & McAuliffe and David B. Goodwin, San Francisco, as Amici Curiae on behalf of Plaintiff and Respondent.

BROWN, Justice.

In this case, we must decide whether, in an action seeking indemnity under a standard commercial general liability insurance policy formerly called a comprehensive general liability insurance policy), the insured or the insurer bears the burden of proving that a claim comes within the "sudden and accidental" exception to the general pollution exclusion..

                [959 P.2d 1214]   The Court of Appeal concluded that once the insurer carries its burden of proving that the exclusion applies, the insured bears the burden of proving the exception.  We agree with the Court of Appeal's conclusion and, therefore, affirm its judgment
                

I. FACTUAL AND PROCEDURAL BACKGROUND

A. The Contamination and the Remedial Action Order

The underlying facts are well summarized in the Court of Appeal's opinion. From 1969 until May 1984, plaintiff Aydin Corporation (Aydin) operated a research and manufacturing complex in Palo Alto at which it fabricated, assembled, and repaired electrical transformers. These operations required the use of a variety of noxious chemicals, oils, solvents, and waste materials. Some of these fluids were stored in metal tanks buried underground; other liquids were kept aboveground in 55-gallon metal drums. The drums and material pumped out of the tanks were turned over to a disposal company.

In 1980, Aydin discovered polychlorinated biphenyl (PCB) ground soil contamination and attempted to correct it. In July 1981, Aydin discovered the PCB contamination had recurred, and on a much larger scale. PCB contamination was found in the area of the underground tanks. There was also solvent contamination of the groundwater beneath the site. The tanks, removed in 1986, contained numerous holes. Aydin notified the California Department of Health Services, which promulgated a remedial action order requiring Aydin to undertake an extensive program of studies, monitoring, and cleanup efforts.

B. The Comprehensive General Liability Insurance Policies

From the beginning of 1980 to the end of 1981 (i.e., during the period when the second PCB contamination was discovered), Aydin had $5 million of excess coverage issued by defendant First State Insurance Company (First State). In each of the two annual comprehensive general liability insurance policies at issue, First State agreed to indemnify Aydin for "all sums which the INSURED shall be obligated to pay by reason of the liability imposed upon the INSURED by law or liability assumed by the INSURED under contract or agreement for damages and expenses, because of: [p] A. PERSONAL INJURY as hereinafter defined; [p] B. PROPERTY DAMAGE, as hereinafter defined ... [p] to which this policy applies, caused by an OCCURRENCE, as hereinafter defined, happening anywhere in the world." The term "OCCURRENCE" is defined as "an accident or event including continuous repeated exposure to conditions, which results, during the policy period, in PERSONAL INJURY or PROPERTY DAMAGE neither expected nor intended from the standpoint of the INSURED...."

Under the heading "EXCLUSIONS," each policy stated that it "shall not apply ... [p] ... [p] ... to any liability of any INSURED, arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, solids, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water unless such discharge, dispersal, release or escape is sudden and accidental." (Italics added.)

C. The Declaratory Relief Action

In 1986, Aydin commenced this action for declaratory relief, seeking a judgment as to the coverage provided by its primary and excess insurers. First State asserted there was no coverage under its policies because, among other things, "[t]he discharge, dispersal, release or escape of the contaminants was not 'sudden and accidental,' pursuant to the pollution exclusion." At trial, the trial court gave the advisory jury the following instruction regarding the burden of proof: "The policies issued by First State contain pollution exclusions. To establish its defense based on the pollution exclusions, First State has the burden of proving by a preponderance of the evidence (1) that Aydin Corporation's liability arises out of the 'discharge, dispersal, release or escape' of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals At the conclusion of its deliberations, the jury answered "NO" to the following two special interrogatories: (1) "Has First State met its burden of proving that Aydin Corporation's legal liability arises out of discharge(s), dispersal(s), release(s) or escape(s) of contaminants, into or upon a water course or body of water, which were not 'sudden and accidental'?" (2) "Has First State met its burden of proving that Aydin Corporation's legal liability arises out of discharge(s), dispersal(s), release(s) or escape(s) of contaminants, into or upon land, which were not 'sudden and accidental'?" The trial court adopted these findings and, after resolving a number of other points not at issue here, entered a declaratory judgment in favor of Aydin.

solids, liquids or gases, waste materials or other irritants, contaminants or pollutants [959 P.2d 1215] into or upon land, the atmosphere or any watercourse or body of water; and (2) that the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, solids, liquids or gases, waste materials or other irritants, contaminants or pollutants was not 'sudden and accidental.' " ¹ First State objected to the second half of this instruction, contending that Aydin should bear the burden of proving the "sudden and accidental" exception.

On appeal, the Court of Appeal concluded that the trial court should have assigned Aydin the burden of proving that its claim came within the "sudden and accidental" exception to the general pollution exclusion. The Court of Appeal accepted Aydin's concession that any error in this regard was prejudicial and, accordingly, reversed the judgment. We granted Aydin's petition for review.

II. DISCUSSION

The general principles governing our review of this matter are well established. The burden is on an insured to establish that the occurrence forming the basis of its claim is within the basic scope of insurance coverage. (Weil v. Federal Kemper Life Assurance Co. (1994) 7 Cal.4th 125, 148, 27 Cal.Rptr.2d 316, 866 P.2d 774; Searle v. Allstate Life Ins. Co. (1985) 38 Cal.3d 425, 437-438, 212 Cal.Rptr. 466, 696 P.2d 1308.) And, once an insured has made this showing, the burden is on the insurer to prove the claim is specifically excluded. (Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 406, 257 Cal.Rptr. 292, 770 P.2d 704; Searle v. Allstate Life Ins. Co., supra, 38 Cal.3d at pp. 437-438, 212 Cal.Rptr. 466, 696 P.2d 1308; Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d 865, 880, 151 Cal.Rptr. 285, 587 P.2d 1098.)

Although the parties agree on these general principles, they disagree as to whether the "sudden and accidental" exception should be construed as a coverage provision or an exclusionary provision when allocating the burden of proof. Aydin asserts First State should bear the burden of negating the exception because it "does not grant coverage; it serves only to establish the reach of the exclusion by describing what coverage already provided by the policy's broadly worded basic coverage provision is not being taken away. " (Original italics.) First State, on the other hand, asserts Aydin should bear the burden of establishing the exception because "its effect is to reinstate coverage that the exclusionary language otherwise bars." For the reasons discussed below, we agree with First State.

At the outset, we note that neither Bebbington v. Cal. Western etc. Ins. Co. (1947) 30 Cal.2d 157, 180 P.2d 673 (hereafter Bebbington ) nor Strubble v. United Services Auto. Assn. (1973) 35 Cal.App.3d 498, 110 Cal.Rptr. 828 (hereafter Strubble ), the two California cases on which Aydin places its primary reliance, is helpful in resolving the instant matter.

In Bebbington, this court addressed a life insurance policy with "a rider providing that in the event of the death of the insured as a result of airplane travel other than as a fare-paying passenger in licensed aircraft flying a regular scheduled passenger flight, the liability of [the insurer] should be limited to the reserve of the policy." (Bebbington, supra Bebbington is not illuminating in the present context. First, there is no indication the proper allocation of the burden of proof was even a contested issue in that case. To the contrary, we devoted the bulk of our opinion to explaining why the specific...