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Aerojet-General Corp. v. Transport Indem. Co.

Citation: 28 ELR 20590
No. S054501, 948 P.2d 909/46 ERC 1025/(Cal., 12/29/1997)

The court holds that a chemical company's site investigation expenses, incurred during several private and government actions resulting from the company's hazardous waste discharges, may constitute defense costs under its comprehensive general liability (CGL) policies. However, defense costs may be allocated to the company for any part of a claim that is not potentially covered by the CGL policies. The court first holds that the company's site investigation expenses may constitute defense costs that the insurers must incur under the CGL policies' duty to defend. Site investigation expenses constitute defense costs if the investigation occurs within the temporal limits of the insurers' duty to defend, the investigation is a reasonable and necessary effort to avoid or minimize liability, and the site investigation expenses are reasonable and necessary. Therefore, the company must, by the preponderance of the evidence, prove the existence, amount, and reasonableness and necessity of its site investigation expenses as defense costs. The court rejects the insurers' arguments that site investigation costs are not defense costs under a CGL policy. Although site investigation costs may be unique to hazardous substances discharge claims, it does not mean that site investigation cannot be a reasonable and necessary effort to avoid or minimize liability. Further, because the test for determining if site investigation expenses are defense costs is objective, the insured will not have carte blanc to pronounce any investigation expenses to be defense costs provided that the insured honestly believes they are. Moreover, although site investigation expenses may be response costs under the Comprehensive Environmental, Response, Compensation, and Liability Act, it does not mean, as the insurers assert, that site investigation expenses cannot be defense costs. The court then remands the case for a determination of whether the company's site investigation expenses qualify as defense costs.

The court next holds that defense costs that can be allocated solely to a part of a claim that is not even potentially covered under a CGL policy may be allocated to the company. The insurer has a duty arising out of the policy as a contract to defend a claim that is at least potentially covered because it possibly embraces a specified triggering harm. Under principles of contract law, the insurer may not obtain reimbursement from the insured for defense costs that can be allocated to a potentially covered claim. The company's insurers were presented with a mixed claim — where part of the claim triggered the specified harm covered by the CGL policy, but part of each claim did not possibly embrace specified harm covered by the policy. Nevertheless, each had a duty to defend all parts of the claim. But if each insurer carries the burden of proof by a preponderance of the evidence, it may allocate defense costs to the company for any part of the mixed claim that was not potentially covered. The court then rejects the insurers' assertion that they may allocate defense costs to the company more broadly as a form of equitable contribution because the company had entered a "fronting" policy from 1976 to 1984 whereby it agreed to defend itself. Equitable contribution applies only between insurers, and has no place between an insurer and an uninsured or self-insured party.

The court then addresses the lower court's holding that defense costs may be allocated pro rata to the company based on the time it held fronting policies. The lower court erred to the extent that it strayed from a contractual analysis of the company's policies. The extent of the duty to defend is not limited to the policy period. If an included occurrence under the policy caused specified harm within the policy period, the duty to defend perdures to all points of time at which some such harm may possibly have resulted thereafter. In addition, the company's insurers assumed the risk and should now carry the burden of defending against any claim that is based on specified harm that may be covered by the insurance policy.

[A decision related to this litigation is published at 21 ELR 21429. Briefs and Pleadings in related litigation are digested at ELR BRIEFS & PLEADS. 66003, 66016, 66386, and 66393.]

Counsel for Appellants
Jose N. Uranga
Nossaman, Guthner, Knox & Elliott
915 L St., Ste. 1000, Sacramento CA 95814
(916) 442-8888

Counsel for Respondents
Michael Skaggs
Rivkin, Radler & Kremer
100 B St., Ste. 300, Santa Rosa CA 95402
(707) 525-5400

Before George, Werdegar, and Brown, JJ.