State v. Underwriters at Lloyd's London

• Decision Date: 28 December 2006
• Docket Number: No. E037627.,E037627.
• Court: California Court of Appeals Court of Appeals
• Parties: STATE of California, Plaintiff, v. UNDERWRITERS AT LLOYD'S LONDON et al., Defendants. State of California, Plaintiff and Appellant, v. Allstate Insurance Company et al., Defendants and Respondents.

54 Cal.Rptr.3d 343

146 Cal.App.4th 851

STATE of California, Plaintiff, v. UNDERWRITERS AT LLOYD'S LONDON et al., Defendants.

State of California, Plaintiff and Appellant, v. Allstate Insurance Company et al., Defendants and Respondents.

No. E037627.

Court of Appeal, Fourth District, Division 2.

December 28, 2006.

Certified for Partial Publication.^*

As Modified Jan. 12, 2007.

As Modified on Denial of Rehearing Jan. 25, 2007.

Cotkin, Collins & Ginsburg, Roger W. Simpson, David W. Johnson, Jr., Los Angeles; Bill Lockyer, Attorney General, Darryl L. Doke, Supervising Deputy Attorney General, Jill Scally, Deputy Attorney General; Law Offices of Daniel J. Schultz, Daniel J. Schultz; Anderson Kill & Olick, Robert M. Horkovich and Edward J. Stein, for Plaintiff and Appellant.

Gauntlett & Associates, David A. Gauntlett, Irvine, and Eric R. Little as Amicus Curiae on behalf of Plaintiff and Appellant.

Berkes Crane Robinson & Seal, Steven M. Crane, Los Angeles, Barbara S. Hodous; Nixon Peabody, Bruce E. Copeland, Alan S. Feiler, San Francisco; Berman & Aiwasian, Alan S. Berman, Steven P. Haskell; Riedl, McCloskey & Waring and Andrew McCloskey for Defendants and Respondents.

Wiley Rein & Fielding, Laura A. Foggan; Sinnott, Dito, Moura & Puebla, Randolph P. Sinnott and John J. Moura, Los Angeles, as Amicus Curiae on behalf of Defendants and Respondents.

OPINION

RICHLI, J.

This is a coverage dispute between the State of California (the State) and four of its liability insurers. The insurers are All-state Insurance Company, Century Indemnity Company, Columbia Casualty Company, and Westport Insurance Corporation, to whom we shall refer collectively as Insurers. The dispute concerns whether Insurers are required to indemnify the State against liability for damage caused to third parties by the discharge of pollutants from the State's "Stringfellow Acid Pits" waste disposal site.

The trial court granted summary judgment in favor of Insurers, based on exclusions in their policies for liability based on pollution and on the discharge of pollutants into a watercourse. The State contends Insurers are estopped from asserting the pollution exclusion, and at any rate neither that exclusion nor the watercourse exclusion excludes coverage here. We reverse the summary judgment, because we conclude the record raised a triable issue whether the State sustained liability for discharge of pollutants that fell within the "sudden and accidental" exception to the pollution exclusion and did not fall within the watercourse exclusion.

I FACTUAL AND PROCEDURAL BACKGROUND

A. The Site

In 1956, the State opened a. Class I Hazardous Waste Site (Stringfellow Site) near Glen Avon in Riverside County. The State's geologist, who investigated the site to determine whether it was suitable, did no soil analysis; he assumed the site was underlain by impermeable rock and there was no water in the bedrock or granite.¹ In fact, there were two buried alluvial channels, and water was moving through bedrock that consisted of decomposed granite and broken rock. A Class I site had to be impermeable or underlain by unusable water.

The State designed the site, which included a concrete barrier dam eight feet high at the downstream (southern) boundary of the site, diversion' channels, and ponds. The State admits it negligently investigated, selected, designed, and supervised the construction of the site, failing to ensure adequate diversion channels and other safeguards to prevent or protect against heavy rains.

The Stringfellow Site operated for about 16 years. During that time, with the knowledge and consent of the State, more than 30 million gallons of liquid industrial wastes were deposited directly into urilined evaporation ponds at the site.

B. Discharges of Pollutants from the Site

1. Subsurface discharges

According to a report prepared by an expert for the State, by 1960 contaminants exited the subsurface of the site around the east and west ends of the concrete barrier and through the fractured bedrock underneath the barrier. From the moment the contaminants left the site, the soils and groundwater became contaminated progressively farther downstream of the site due to the continuous motion of the groundwater to the southwest. Through at least the late 1980's, the plume of contamination was moving progressively farther from the site. As of the date of the report, July 2004, damage to the soils and groundwater downgradient of the site was ongoing.

2. 1969 discharge

For purposes of the summary judgment motion from which this appeal arises, the parties agreed to the following facts. According to rainfall records, it rained heavily in January and February of 1969, with nearly seven inches of rainfall in January and eight inches in February. Not later than March 17, 1969, a once-in-50-year rainstorm of some 20 inches inundated the site, causing the contaminants at the site to overflow into the surrounding environment, including the City of Glen Avon.

In November 1972, the State found contamination in the groundwater, and the site was closed. No later than January 1973, signs of leaking were observed at the site. The leakage was worse by 1975. A 1974 report by the State's chief geologist recommended (1) a hydraulic barrier to capture waste flowing out of the site in the subsurface, to protect groundwater; and (2) leveling the site and putting an impervious cap on it, to prevent overflow in case of rain.

3. 1978 discharges

By the beginning of the 1978-1979 rainy season, the recommended measures had not been taken. After heavy rains in early 1978, all of the ponds at the site were full. On March 5, 1978, they began to overflow. The State decided to make a "controlled discharge" of waste from the site. The waste from the controlled discharge went directly into Pyrite Creek and from there across a roadway, down a channel, across a street just below a school, and into the Santa Ana River.

Three days after the first controlled discharge, a section of the dam had given way and was moving, and there was a 50-foot crack in the dam as well. To prevent the failure of the dam, the State made another controlled discharge, again discharging waste directly into Pyrite Creek and affecting areas as much as six miles downstream from the site.

The two controlled discharges in March 1978 released more than one million gallons of rain-diluted waste into the environment. In addition, during later rains the contaminants in the downstream surface soils repeatedly migrated and further damaged the environment. By December 1979, the contaminant plume had reached a street in the adjacent community. The release of waste in 1978 would not have occurred if the State had installed the hydraulic barrier and cap.

C. The Federal Action

In 1983, the United States of America and the State brought a civil action in federal `district court (the federal action) against companies that had disposed of waste at the Stringfellow Site. (United States of America et ol v. J.B. Stringfellow, Jr., et al, supra, case No. CV83-2501 JMI, 1995 WL 450856.) The companies counterclaimed against the State for damages caused by progressive environmental contamination occurring at and emanating from the site. In September 1998, the court in the federal action held the State 100 percent liable for past and future costs of remediating the contamination tion.² According to the State, the costs exceed $500 million. The State alleges it paid $99.4 million and received from the counterclaimants a waiver of an estimated $100 million in return for dismissing its appeal from the judgment in the federal action.

D. The Policies

After the site was closed, but before the 1978 discharges, the State purchased comprehensive general liability excess insurance policies from Insurers. The terms of the policies varied, but together they provided coverage from September 1976 to May 1978. Although the policies were purchased after the site ceased operations, Insurers have not argued for purposes of summary judgment or this appeal that there is no coverage for that reason. While the language of the policies varied, Allstate's, Century's, and Westport's were in the same form and said essentially the same thing. For convenience, in this opinion we will quote the policy issued by Allstate's predecessor, which is sufficiently representative of the other two policies for our purposes.

The coverage clause of the policy obligates the insurer "[t]o pay on behalf of the Insured all sums which the Insured shall become obligated to pay by reason of liability imposed by law, including Chapter 1681 of the State of California Statutes of 1963, or liability assumed by contract, insofar as the State may legally do so, for damages, including consequential damages, because of direct damage to or destruction of tangible property (other than property owned by the Insured), including the loss of use thereof, which results in an Occurrence during the policy period."³ An "Occurrence" is "an accident, event or happening including continuous or repeated exposure to conditions which results, during the policy period, in ... Property Damage neither expected nor intended from the standpoint of the Insured."

The policy also contains a "pollution exclusion." The exclusion states that the policy does not apply to damage "arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land or the atmosphere, but this exclusion does not apply if such discharge, dispersal[,] release or escape is sudden and accidental." (Italics added.)⁴ The Columbia policy also contains this exclusion, with the modification noted below.

Finally, the policy contains a "watercourse exclusion," which states: "It is further agreed that the Policy does not apply to Personal Injury or Property Damage arising out of the...