ELR Citation: ELR 20315
No(s). S012525 (Cal. Nov 15, 1990)

The court rules that insurers are liable under comprehensive general liability (CGL) policies for the costs of reimbursing government agencies and complying with injunctions ordering toxic waste cleanup under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and other federal and state environmental laws. The United States and local administrative agencies filed third-party suits seeking environmental cleanup costs and injunctive relief for land, groundwater, surface water, and aquifer contamination at 79 different hazardous waste disposal sites, allegedly caused by an insured corporation that held more than 60 primary CGL policies. The insured sought a judgment establishing that the CGL policies cover costs it may become obligated to pay as a result of the third-party suits. The superior court granted the insured a favorable judgment and the court of appeal reversed. The court reviews as a question of law whether any adverse orders in the third-party suits will "legally obligate" the insured to pay cleanup costs, whether the costs will constitute "damages" or "ultimate net loss," and whether cleanup costs will be incurred because of "property damage." The court declines to consider the applicability of exclusions, because only the coverage clauses are at issue.

Applying established principles of contract interpretation, the court construes the policy's plain meaning according to the parties mutual intentions at the time the contract was formed and resolves ambiguities in favor of coverage. The court rules that CGL insurance policies provide coverage for all sums an insured becomes legally obligated to pay as " damages" or "ultimate net loss" because of property damage. The court first holds that the term "legally obligated" covers injunctive relief and recovery of response costs. Otherwise, it would come as an unexpected shock to the insured to discover that insurance coverage was denied because a plaintiff chose to frame a complaint in equity rather than in law. Even a legally sophisticated policyholder might not anticipate that the term "legally obligated" precludes coverage of equitably compelled expenses. The court next holds that the statutory and dictionary definitions of "damages," which all require that compensation in money be recovered by a party for loss or detriment it has suffered through the acts of another, are the ordinary and plain definition of "damages" for interpretative purposes. The court next holds that government response costs are "damages" for CGL insurance reimbursement purposes. Courts have routinely referred to reimbursement of CERCLA response costs as "damages," regardless of the nature of the cleanup performed or of the plaintiff's property interest, and the ordinary meaning of "damages" as stated by statute, dictionaries, and the courts encompasses reimbursement of response costs. Furthermore, when agencies charged with the duty of removing hazardous waste seek reimbursement of their response costs, the basis of the claim is harm done to the public fisc, which constitutes "loss" or "detriment" in ordinary terms, and reimbursement by responsible parties is monetary "compensation" for this loss. The court concludes that Congress did not intend that reimbursement of CERCLA response costs be treated as definitionally or conceptually distinct from the recovery of damages. Moreover, any distinction in CERCLA between response costs and damages is immaterial to a question of state law interpretation; in entering into CGL policies, the parties could not have been influenced by the niceties of statutory language adopted many years after the policies were drafted. The court also concludes that, contrary to the insurers' arguments, it is immaterial whether or not the agencies, in seeking reimbursement of response costs, have suffered harm to a proprietary interest. An ordinary definition of "damages" does not necessarily focus on the aggrieved party's proprietary interest. Similarly, the court holds that reimbursement of environmental response costs incurred for mitigative purposes constitutes "damages" in ordinary terms. A contrary result would fail to fulfill the parties' reasonable expectations, and unlike a situation in which agencies seek prophylactic measures, reimbursement of environmental response costs cannot be viewed as an uninsurable cost of doing business. Further, the court concludes that the concepts of restitution and compensatory damages are both within the definition of "damages." Whatever distinctions courts have drawn between restitution and compensatory damages in other contexts, both concepts in ordinary terms are within the definition of "damages," a fact dispositive for interpretation. Cases holding that the insurer has no duty to defend when the insured is required to restore that which was wrongfully acquired are inapposite because CERCLA is a strict liability statute that serves remedial goals, irrespective of fault. In a footnote, however, the court observes that insurance coverage would be prohibited if it was proved that willful acts of hazardous waste disposal by the insured necessitated cleanup. The court next holds that the CGL policy language is ambiguous as applied to remedial and mitigative costs incurred pursuant to an injunction under CERCLA and similar statutes, and must be construed in favor of the reasonable expectations of the insured. Under CERCLA and similar statutes, injunctive relief and reimbursement of response costs serve substantially the same purpose. The court holds that because an insured would reasonably expect equal coverage of the costs of equivalent or alternative remedies, the costs of injunctive relief are "damages" for CGL purposes. The court concludes that it is incorrect to portray injunctive relief under CERCLA and related statutes as wholly prophylactic. Thus, the costs of compliance must be interpreted as "damages" in the environmental context, because to hold otherwise would make insurance coverage hinge on the mere fortuity of the way in which government agencies seek to enforce cleanup requirements, would unreasonably constrain the agencies' choice of cleanup mechanisms, and would introduce substantial inefficiency into the cleanup process. Furthermore, the prima facie case for injunctive relief is identical to that for reimbursement of response costs, with the single added element of "imminent and substantial endangerment of the public health or welfare or the environment." Injunctive relief is an equivalent substitute for the goal of government remedial action, and to interpret CGL policies to cover one remedy but not the other would exalt form over substance. The court next holds that the insured's contamination of the environment constitutes "property damage," and response costs and the costs of injunctive relief under CERCLA and other statutes are incurred "because of" property damage. That the governments may seek reimbursement of response costs or injunctive relief without themselves having suffered any tangible harm to a proprietary interest does not exclude the recovery of cleanup costs from coverage under the "damages" provision of CGL policies. The agencies allege that the waste sites, and water on and surrounding the sites, have already been contaminated by hazardous waste, and the policies do not specify that coverage hinges on the nature or location of property damage. Finally, the court notes that the costs of complying with injunctions that order an insured to undertake prophylactic measures are not covered by CGL policies.

Counsel for Real Party in Interest
David W. Steuber, Eugene R. Anderson
Hill, Wynne, Troop & Meisinger
10940 Wilshire Blvd., 9th Fl., Los Angeles CA 90024
(213) 824-7000

Counsel for Petitioner
Deborah Pitts
Buchalter, Nemer, Fields & Younger
700 S. Flower St., Ste. 700, Los Angeles CA 90017
(213) 626-6700

MOSK, BROUSSARD, PANELLI, EAGLESON, KENNARD and ARABIAN, JJ., concur.