Shell Oil Co. v. Winterthur Swiss Ins. Co.

• Court: California Court of Appeals
• Writing for the Court: CHIN; WHITE, P.J., and MERRILL
• Citation: Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal.App.4th 715, 15 Cal.Rptr.2d 815 (Cal. App. 1993)
• Decision Date: 21 January 1993
• Docket Number: No. A045544,A045544
• Parties: SHELL OIL COMPANY, Plaintiff and Appellant, v. WINTERTHUR SWISS INSURANCE COMPANY et al., Defendants and Respondents; Sun Insurance Office, Ltd., et al., Defendants, Cross-complainants, and Respondents; Travelers Indemnity Company et al., Defendants, Cross-complainants, and Appellants; Oil Insurance Limited, Cross-defendant and Appellant.

Page 815

15 Cal.Rptr.2d 815

12 Cal.App.4th 715

SHELL OIL COMPANY, Plaintiff and Appellant, v. WINTERTHUR SWISS INSURANCE COMPANY et al., Defendants and Respondents Sun Insurance Office, Ltd., et al., Defendants, Cross-complainants, and Respondents Travelers Indemnity Company et al., Defendants, Cross-complainants, and Appellants Oil Insurance Limited, Cross-defendant and Appellant.

No. A045544.

Court of Appeal, First District, Division 3, California.

Jan. 21, 1993.

Certified for Partial Publication ^*

As Modified on Denial of Rehearing Feb. 22, 1993.

Review Denied May 13, 1993.

William E. Trautman, William S. Boyd, Thomas M. Peterson, Edward J. Burke, Brobeck, Phleger & Harrison, San Francisco, for plaintiff and appellant.

William L. Berry, Jr., Aerojet-General Corp., Rancho Cordova, Lasky, Haas, Cohler & Munter, Moses Lasky, John E. Munter, Scott P. DeVries, San Francisco, for amici curiae on behalf of plaintiff and appellant.

Berg, Differto, Tighe & Cottrell, Howard M. Berg, Wilmington, DE, Bronson, Bronson & McKinnon, Gary T. Walker, Vern I. Zvoleff, San Francisco, Buchalter, Nemer, Fields & Younger, Robert A. Zeavin, Victor Rabinowitz, Wm. David Campagne, Adrienne F. Millican, Charlston, Revich & Williams, Richard D. Williams, Los Angeles, Finan, White & Paetzold, Floyd W. White, Fisher & Hurst, Robert N. Schiff, Garth Gersten, Gordon & Rees, Donald W. Rees, Carol E. Reese, LeBoeuf, Lamb, Leiby & MacRae, Sanford Kingsley, Karen Hahn Ventrell, Long & Levit, John E. Peer, Irene K. Greenberg, San Francisco, Macarthur & Uribe, J.A. Uribe, Cecilia A. Perkins, Los Angeles, O'Melveny & Myers, John F. Daum, Martin S. Checov, Richard B. Goetz, San Francisco, Owen & Melbye, John S. Posthauer, Redwood City, Popelka, Allard, McCowan & Jones, James C. Jones, Jr., Brian E. Hawes, San Jose, St. Clair, McFetridge & Griffin, Edward J. McFetridge, Patrick J. Byrne, San Francisco, Shearman & Sterling, Lynette C. Kelly, Standard, Weisberg, Heckerling & Rosow, Malcolm B. Rosow, Arthur J. Leiderman, New York City, for defendants and respondents.

Adams, Dunque & Hazeltine, Mitchell L. Lathrop, Cathy L. Carver, Bishop, Barry Howe, Haney & Ryder, Jeffrey N. Haney, Richard L. Pierce, San Francisco, Gleason, McGuire & Schreffler, Thomas B. Keegan, David Schroeder, Chicago, IL, Hancock, Rothert & Bunshoft, Barry L. Bunshoft, Philip R. Matthews, Vito C. Peraino, Paul J. Killion, Kenneth D. Ayers, San Francisco, Rivkin, Radler, Bayh, Hart & Kramer, William M. Savino, Stephen J. Smirti, Jr., Cyrus G. Dolce, Uniondale, NY, Rogers & Wells, Charles R. Hartman, John A. Karaczynski, Los Angeles, Daniel U. Smith, Kentfield, for defendants, cross-complainants, and respondents.

Barry W. Lee, Steefel, Levitt & Weiss, Dinkelspiel, Donovan & Reder, San Francisco, Simpson, Thacher & Bartlett, Barry R. Ostrager, Mary Kay Vyskocil, Dennis G. Jacobs, Ellen M. Bonaventura, Jonathan P. Rich, Elisa Alcabes, Allan Tananbaum, New York City, for defendants, cross-complainants, and appellants.

Crosby, Heafey, Roach & May, Raoul D. Kennedy, James T. Wilson, Joseph P. Mascovich, Oakland, for cross-defendant and appellant.

CHIN, Associate Justice.

INTRODUCTION

Shell Oil Company (Shell) raises difficult issues regarding insurance coverage for environmental pollution liability. Shell's main contentions involve interpreting standard comprehensive or commercial general liability (CGL) insurance language and California's statutory bar against insuring "wilful" acts. Shell challenges numerous rulings made during a long and complex trial.

In 1952, Shell assumed a lease of part of the Rocky Mountain Arsenal (Arsenal), a United States Army (Army) complex in Colorado. At the Arsenal Shell manufactured chemicals and pesticides and disposed of its wastes using Army facilities. Over the years, toxic wastes from both Shell and the Army contaminated soil and groundwater. The cost to remedy this pollution has been estimated at $1.8 billion. In December 1983, the United States and the State of Colorado (Colorado) sued Shell for remediation costs and environmental damage. Shell and the United States eventually agreed on Shell's share of the Arsenal's cleanup costs. Shell's liability for pollution at the Arsenal could reach hundreds of millions of dollars.

Shell maintained a primary layer of liability insurance and multiple layers of excess coverage. During its years at the Arsenal, the company bought approximately 800 CGL policies. Travelers Indemnity Company (Travelers) was Shell's primary CGL insurer for property damage liability until 1975, when Aetna Casualty and Surety Company (Aetna) and then Insurance Company of North America (INA) issued Shell's primary coverage. A battery of insurers provided excess coverage. ¹

Shell identified six distinct causes of pollution at the Arsenal. Shell asserts each cause was an "occurrence" covered by its insurers, except Oil Insurance Limited (OIL), an insurer Shell owned with other oil industry members. For many reasons, the insurers denied any obligation to indemnify Shell for the Arsenal pollution. Principally, the insurers contend that Shell knew or should have known that its Arsenal operations created a substantial probability of environmental damage.

In phase I of the trial, the court interpreted the relevant policy provisions. In phase II, a jury heard extensive testimony on the Arsenal pollution and was instructed on the policy term meanings determined in phase I. The jury found against Shell; the judgment denied any coverage for the Arsenal claims.

On appeal, Shell attributes error to several elements of the phase I interpretations and the jury instructions. Foremost among Shell's issues are: (1) the rules the trial court used to interpret the insurance policies; (2) the scope of Insurance Code section 533; ² (3) whether "expected," as used in the policies and exclusions, implies an objective, reasonable person standard or a subjective test that examines the insured's state of mind; (4) whether "sudden" means only "unexpected" or instead refers to events that are abrupt; (5) whether exclusions for property in Shell's care, custody, or control were properly submitted to the jury; and (6) whether the insurers' defense that Shell did not give timely notice of the Arsenal claims should have gone to the jury. Travelers also appeals, contending that OIL must contribute to the nearly $17 million Travelers advanced for Shell's defense against the United States and Colorado.

We conclude that two of Shell's arguments have merit. The insurers did not show substantial actual prejudice caused by untimely notice from Shell, but sending this defense to the jury was harmless error. More importantly, we hold that the jury was given a mistaken definition of "expect" that turned not on what Shell knew, but on what Shell should have known. This error requires that we reverse the judgment in part and remand the case. However, certain policies contained pollution exclusions that preclude coverage of the Arsenal claims. Therefore, we affirm the judgment as to those policies. We also affirm denial of Travelers' contribution claim because OIL was an excess insurer and the primary insurance was not exhausted.

FACTS

1. The Arsenal

The Arsenal covers roughly 28 square miles near Denver, Colorado. It was created in 1942 to produce chemical munitions for the Army, including nerve gas, blistering agents, and incendiary devices. The Arsenal was built in six months, using whatever was available to accommodate wartime exigencies. After the war, the Army used the Arsenal to produce, store, and demilitarize chemical warfare agents, but part of the manufacturing capacity became surplus.

The Army offered to lease the Arsenal's surplus chemical manufacturing plants and equipment. In 1947, the Julius Hyman Company (Hyman) leased part of the Arsenal to manufacture chemical pesticides in the same equipment the Army had used to make chemical weapons. The lease payments covered disposal of manufacturing wastes in the Army's waste facilities on the Arsenal.

Shell purchased Hyman in May 1952 and merged it into Shell Chemical Company about two years later. With the purchase, Shell assumed the Arsenal lease and hired almost all of Hyman's employees. Shell used the Arsenal to manufacture agricultural chemicals, such as pesticides and herbicides, and some chemical products for the Army. Shell's Arsenal operations necessarily generated a stream of toxic wastes. Shell operated its Arsenal facilities 24 hours a day, every day, for years.

2. The Arsenal Waste System

The Arsenal's effluent wastes drained into large, shallow evaporation basins. A chemical sewer system installed for the Army Corps of Engineers in the early 1940's carried the wastes to the basins. Shell used the Army's effluent waste disposal system until 1978.

The first evaporation basin, Basin A, was built in 1943 by scraping soil from a natural depression. Nothing covered the basin bottom to make it impervious to liquids. The wastes sent to the basin were expected to evaporate or seep into the ground and bind with the soil, clay, and gravel underlying the basin. Water and salt made up the greatest portion of the waste sent to the basin.

Basin A started overflowing as the waste volume increased. To catch the overflow, a series of smaller evaporation basins, Basins C, D, and E, were built in the early 1950's. These basins were made the same way as Basin A, and relied on the same processes to handle the waste effluent. Basin C, though, was so porous that it was called "straw bottom."

In the mid-1950's, complaints of crop damage and salt contamination on farms northwest of the Arsenal led to the construction of Basin F. This basin covered 93 acres and was approximately 10 feet deep. It had a three-eighths-inch-thick asphalt liner to prevent waste effluent from seeping into the groundwater. Shell's effluent wastes were sent to Basin F from 1956 until 1978.

Wastes that Shell could...