California Courts of Appeal Reports
STATE v. UNDERWRITERS AT LLOYD’S LONDON, E037627 (Cal.App.
12-28-2006) 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. E037627 Court of Appeal
of California, Fourth District, Division Two. Filed
December 28, 2006 Certified for Partial Publication[fn*]
[fn*] Pursuant to California Rules of Court, rules 976(b)
and 976.1, this opinion is certified for publication with
the exception of parts II.A-E.
[EDITORS’ NOTE: PURSUANT TO CALIFORNIA RULES OF COURT,
RULES 976(b) AND 976.1 THIS OPINION IS CERTIFIED FOR
PARTIAL PUBLICATION. THE SHADED TEXT BELOW REPRESENTS THE
ORIGINAL OPINION AND IS PROVIDED FOR REFERENCE PURPOSES
ONLY.]
APPEAL from the Superior Court of Riverside County, No.
CIV239784, No. RIC381555, E. Michael Kaiser, Judge.
Reversed with directions.
Cotkin, Collins & Ginsburg, Roger W. Simpson, David W.
Johnson, Jr.; 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 and Eric R.
Little as Amicus Curiae on behalf of Plaintiff and
Appellant.
Berkes Crane Robinson & Seal, Steven M. Crane, Barbara S.
Hodous; Nixon Peabody, Bruce E. Copeland, Alan S. Feiler;
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 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 Allstate 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.[fn1] 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, 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 unlined evaporation ponds at
the site.
B. Discharges of Pollutants from the Site
Annual rainfall for 1969 was more than 200 percent of
normal. In March 1969, a heavy rainstorm inundated the
site, causing polluted rainwater to overflow and
contaminate the environment. Additional damage to the
environment occurred during later rains when surface soils
repeatedly migrated. According to the State, the 1969
discharge “happened when heavy rains caused industrial
wastes to escape from the site through a washed out section
of a dike.”
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.
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 al., v.
J.B. Stringfellow, Jr., et al., supra, case No. CV83-2501
JMI.) 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.[fn2] According to the State, the costs
exceed $500 million. The State alleges it paid $99.4 million
and received from the counter-claimants 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 (CGL)
excess insurance policies from Insurers. The terms of the
policies varied, but together they provided coverage from
September 1976 to May 1978. It does not appear to be
disputed that if the policies are otherwise applicable,
they will provide coverage for discharges from the
Stringfellow Site even though they were purchased after it
ceased operations.
Although the language of the policies varied, Allstate’s,
Century’s, and Westport’s used the insurance industry’s
then-standard form 1966 CGL policy 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 1966 standard form CGL policy
obligates the insurer to pay “all sums which the Insured
shall become obligated to pay by reason of liability
imposed by law” because of direct damage to property “which
results in an Occurrence during the policy period.”[fn3] 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, which was added to the standard CGL policy in
1970, 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.)[fn4] 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 discharges, dispersal, release or escape of smoke,
vapors, soot, fumes, acids, alkalis, toxic chemicals,
liquids or gases, wate [sic] materials or other irritants,
contaminants or pollutants into or upon any watercourse or
body of water.”
Columbia’s policy differs from the standard policy in two
ways that should be noted here. First, instead of the
coverage clause quoted above, the Columbia policy merely
states that the insurer will “indemnify the insured for the
amount of loss which is in excess of the applicable limits
of liability of the underlying insurance” to which the
policy is excess. “Loss” is defined as “the sums paid as
damages in settlement of a claim or in satisfaction of a
judgment for which the insured is legally liable,” minus
certain deductions. The policy states it is excess to
“Underwriters at Lloyds, London Policy #TBA,” but there is
no policy number filled in.
The parties stipulated that this copy of the Columbia
policy was “the most complete evidence” of the policy that
was available. The record contains no subsequent
stipulation supplying the number of the underlying policy,
nor does it contain a copy of the underlying policy.
Therefore, we are unable to determine what, if any, effect
the terms of the underlying policy might have on the
coverage provided by the Columbia policy.
The second difference between the standard policy and the
Columbia policy is that the Columbia policy does not
contain a separate watercourse exclusion. Instead, the
pollution exclusion provides that it also applies to
discharges into or upon “any watercourse or body of water.
. . .” The effect is that Columbia’s watercourse exclusion
is subject to the same “sudden and accidental” exception as
is the rest of its pollution exclusion.
E. The Present Action
The State filed the present action in September 2002. The
operative complaint, the first amended complaint (hereafter
the complaint), alleged claims for declaratory relief,
breach of contract, and breach of the implied covenant of
good faith and fair dealing. Although the complaint named
about 30 insurance companies, Insurers are the only
defendants involved in this appeal.
In the complaint, the State alleged that it notified
Insurers of the federal action and the judgment against it
and demanded that Insurers indemnify it against any
liability arising from the judgment, but Insurers denied
coverage.
F. The Trial Court’s Grant of Summary Judgment
In October 2004, Insurers moved for summary judgment or
summary adjudication of issues based on the pollution
exclusion and the watercourse exclusion. The court heard
the motions in November 2004.
The court accepted Insurers’ argument that the 1969 and
1978 releases were excluded from coverage because the event
that triggered the coverage was the initial deposit of
wastes into the site, which was neither sudden nor
accidental. The later escape of pollutants from the site
was not a covered event and therefore could not provide a
basis for coverage even if it were “sudden and accidental.”
The court also found that the watercourse exclusion
precluded coverage. Finally, the court found that the State
was required to allocate damage between covered and
uncovered causes and had failed to do so.
In December 2004, the court granted summary judgment in
favor of all four Insurers. The State erroneously appealed
from the order granting summary judgment instead of the
judgment itself, but we construe the notice of appeal to be
from the judgment. (H.N. & Frances C. Berger Foundation v.
City of Escondido (2005) 127 Cal.App.4th 1, 6-7, fn. 5.)
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