Powerine Oil Co., Inc. v. Superior Court
118 P.3d 589, 33 Cal. Rptr. 3d 562, 37 Cal. 4th 377 (2005)
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Rule of Law:
An excess/umbrella insurance policy that expressly indemnifies the insured for 'damages... and expenses,' and further defines this obligation through 'ultimate net loss' to include sums paid via 'compromise' or 'settlement... of claims,' provides coverage for environmental cleanup costs ordered by an administrative agency, even in the absence of a formal lawsuit.
Facts:
- Powerine Oil Company (Powerine) engaged in oil refinery operations in Southern California, which resulted in soil and groundwater contamination at several locations.
- The California Regional Water Quality Control Boards (Regional Water Boards), an administrative agency, initiated remedial proceedings against Powerine under the Porter-Cologne Act.
- The Regional Water Boards issued two cleanup and abatement orders to Powerine requiring it to remediate the pollution.
- These orders were not issued as a result of a court lawsuit or as part of a judicial injunction; one order followed negotiations and compromises between Powerine and the agency.
- Powerine held nine excess/umbrella insurance policies issued by Central National Insurance Company of Omaha (Central National).
- The policies agreed to indemnify Powerine for 'all sums which the Insured shall be obligated to pay by reason of the liability... imposed upon the Insured by law... for damages, direct or consequential and expenses.'
- This obligation was further defined by the term 'ultimate net loss,' which included sums the insured becomes obligated to pay 'either through adjudication or compromise,' as well as expenses for the 'settlement, adjustment and investigation of claims and suits.'
Procedural Posture:
- Another insurer filed a declaratory relief action against Powerine in Los Angeles County Superior Court (trial court).
- Powerine filed a cross-complaint against numerous insurers, including Central National, seeking indemnification for the cleanup orders.
- Following a separate appellate decision, Central National moved for summary adjudication in the trial court on its duty to indemnify under its excess/umbrella policies.
- The trial court granted Central National's motion for summary adjudication, ruling there was no duty to indemnify because the cleanup costs were not court-ordered 'damages'.
- Powerine (petitioner) appealed the trial court’s order to the Court of Appeal.
- The Court of Appeal issued a writ of mandate directing the trial court to vacate its order and deny Central National's motion, finding the policy language was broader than that in prior cases.
- Central National (petitioner) sought review of the Court of Appeal's decision in the California Supreme Court, which was granted.
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Issue:
Does an excess/umbrella insurance policy that indemnifies the insured for 'damages... and expenses,' defined as 'ultimate net loss,' obligate the insurer to cover environmental cleanup and abatement costs imposed by an administrative agency outside of a formal lawsuit?
Opinions:
Majority - Baxter, J.
Yes. An excess/umbrella insurance policy that indemnifies for 'damages... and expenses,' with 'expenses' defined by 'ultimate net loss' to include compromises and settlements of claims, obligates the insurer to cover environmental cleanup costs imposed by an administrative agency. The court's reasoning distinguished this case from its prior holding in Powerine I, which involved a standard CGL policy covering only 'damages.' Here, the inclusion of the term 'expenses' in the insuring agreement signifies an intent to provide coverage beyond court-ordered money judgments. This interpretation is reinforced by the policy's definition of 'ultimate net loss,' which explicitly includes sums payable through 'compromise' and the 'settlement, adjustment and investigation of claims,' not just 'adjudication' of 'suits.' Because a 'claim' is distinct from a formal 'suit,' the policy language unambiguously extends coverage to liabilities arising from administrative proceedings. Furthermore, the policies function as 'umbrella' coverage, creating a reasonable expectation that they would fill gaps left by the primary policy, which did not cover these administrative costs.
Analysis:
This decision establishes a critical distinction between the scope of indemnity under standard primary CGL policies and certain broadly worded excess/umbrella policies. While previous rulings like Powerine I narrowly construed 'damages' to mean only court-ordered awards, this case demonstrates that the addition of terms like 'expenses' and references to settling 'claims' can expand coverage to include costs from administrative environmental orders. This holding provides a pathway for policyholders to secure coverage for significant environmental liabilities that do not arise from traditional litigation. It emphasizes that the specific contractual language, particularly in the definition of 'ultimate net loss' and the insuring agreement, is paramount in determining an insurer's duty to indemnify outside the context of a formal lawsuit.
