Hydro Systems, Inc. v. Continental Ins. Co., CV 88-6652-RJK (GHKx).

• Decision Date: 28 July 1989
• Docket Number: No. CV 88-6652-RJK (GHKx).,CV 88-6652-RJK (GHKx).
• Citation: 717 F. Supp. 700
• Parties: HYDRO SYSTEMS, INC., a California corporation, Plaintiff, v. CONTINENTAL INSURANCE COMPANY, a New Hampshire corporation, Defendants.
• Court: U.S. District Court — Central District of California

717 F. Supp. 700

HYDRO SYSTEMS, INC., a California corporation, Plaintiff, v. CONTINENTAL INSURANCE COMPANY, a New Hampshire corporation, Defendants.

No. CV 88-6652-RJK (GHKx).

United States District Court, C.D. California.

July 28, 1989.

Arthur Fine, Douglas W. Bordewieck, Mitchell, Silberberg & Knupp, Los Angeles, Cal., for plaintiff.

Jeffrey S. Barron, Michael T. Colliau, Morris, Polich & Purdy, Los Angeles, Cal., for defendants.

MEMORANDUM OF DECISION AND ORDER

KELLEHER, Senior District Judge.

BACKGROUND

This is a diversity action for breach of an insurance contract. Plaintiff, Hydro Systems ("Hydro"), manufactures fiberglass bathtubs. The 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 the manufacturing process, gaseous styrene is liberated from the gel coat and resin and is emitted into the air. The styrene is dispersed into the air by means of exhaust fans and stacks. The manufacturing process takes place on Moreland Road in Simi Valley, California ("the Moreland Facility").

During the spring and summer of 1988, residents of a Simi Valley neighborhood known as the "Greek Tract" made complaints about the odors associated with the styrene emissions from the Moreland Facility. The complaints were made to Simi Valley officials and to 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 complaints of odors and fumes emanating from the plant constituted a violation of the municipal code. The City threatened action to obtain compliance if Hydro did not act. In June and July, 1988, the City's planning commission held hearings to decide whether to suspend, modify, or revoke Hydro's operating permit. The commission rejected Hydro's initial proposal to raise the height of the 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 ninety days.

Hydro appealed the planning commission action to the city council and instituted an action in state court. In July, 1988, certain Greek Tract residents intervened in the action. The intervenors filed a complaint in intervention contending that the styrene emissions from the Moreland Facility were causing them bodily injury and property damage. The intervenors, however, did not seek monetary damages for past or future losses, praying 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 TRO 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 Hydro to operate on a reduced schedule until October 25, 1988, while it attempted to ameliorate odors emitted from the facility. In response, Hydro installed a carbon absorption air pollution control system to absorb and neutralize the styrene vapors which otherwise would be emitted into the atmosphere.

Both parties contend that this action should be resolved on cross-motions for summary judgment. Continental argues that the pollution exclusion in the policy eliminates coverage. Continental also argues that Hydro's claims are not covered because the styrene emissions were not accidental and because they do not constitute sums Hydro was legally obligated to pay as damages. Hydro counters that Continental has waived its right to rely on certain policy exclusions by failing to properly investigate Hydro's claims and by failing to specify grounds for non-coverage in Continental's letter denying coverage. Hydro claims that Continental has breached its duties to indemnify and to defend Hydro, and that Continental has breached the implied covenant of good faith and fair dealing.

As discussed below, the pollution exclusion applies to Hydro's claims, and therefore Continental has not breached its duties. Because the pollution exclusion applies, the Court does not address Continental's other grounds for non-coverage.

DISCUSSION

I. Pollution Exclusion

Continental contends that Hydro's styrene emissions are excluded by the policy's pollution exclusion. The exclusion provides:

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, costs or expenses associated therewith, alleging such injury, damage, loss cost or expense as described in (1) and (2) above.

The exclusion does not apply to the "products-completed operations hazard" with several provisos, which will be discussed more fully below.

Styrene, the chemical substance forming the basis of the residents' complaints and the City's order, is a pollutant as defined by the pollution exclusion. Gaseous styrene is defined as an "air contaminant" or "air pollutant" by Cal. Health & Safety Code sec. 39013. Hydro sets forth in its complaint that styrene is a hydrocarbonbased gas or vapor which is emitted into the ambient atmosphere by its manufacturing process. The relief sought by Hydro falls within the exclusion.

Hydro contends that the exclusion does not apply because the styrene emissions fall within the "products-completed operations hazard" exception to the exclusion. The policy defines "products-completed operations hazard" to include "all `bodily injury' and `property damage' occurring away from premises you own or rent and arising out of `your product' or `your work'...." "Your product" is defined as any "goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by you."

Hydro claims that styrene should be considered a product under this section because styrene is generated by Hydro's work and disposed of by Hydro through its stacks. However, Hydro ignores the provisos to the products-completed hazards exception. This exception applies to the pollution exclusion provided that:

(1) the emission ...

(a) does not occur at or from any site or location used ... for the handling, storage, disposal ... of "waste";

(2) "your work" does not ... involve any "clean-up" of pollutants ...

(4) any loss, cost or expense incurred as a result of any "clean-up" of "pollutants" is not the result of a governmental directive or request,....

Therefore, if styrene were to be considered a "product" by Hydro, it would not be covered under...