California Supreme Court Addresses Key Issues Involving Sudden and Accidental Exception to Pollution Exclusion
On March 9, 2009, the California Supreme Court issued an opinion interpreting the “sudden and accidental” exception to the pollution exclusion. See State of California v. Allstate Ins. Co., Nos. RIC381555, CIV239784 (Cal. Mar. 9, 2009). The key issues before the court were: (1) whether the focus of the pollution exclusion is on the initial deposit of chemical wastes into storage on the site or on the escape of pollutants from the site into the larger environment, and (2) the burden of proving whether the property damage for which the insured was liable was caused by sudden and accidental discharges.
The State of California (“State”) sought coverage from multiple insurers for its liability under federal pollution laws for property damage resulting from the escape of hazardous wastes from the “Stringfellow Acid Pits,” a hazardous waste disposal facility designed, built and operated by the State in Riverside County. Remediation costs were expected to exceed $500 million. The State constructed open, unlined evaporation ponds to contain the hazardous waste, channels to divert rainwater around the site, and a barrier dam at the bottom of the site. In 1960, four years after the site had opened, a report found that chemical pollution was seeping into the groundwater through fractured rock and around the barrier dam. Overflow occurred at the site due to a rainstorm in 1969, and the State made a series of controlled discharges following heavy rains in 1978, releasing roughly one million gallons of diluted waste.
All of the comprehensive general liability policies at issue had a pollution exclusion with an exception for “sudden and accidental” discharges, dispersals, releases or escapes. The Supreme Court first addressed the issue of whether the relevant discharge under the pollution exclusion was the initial deposit of waste on the site, or the escape of pollutants from the site into the land and groundwater outside the ponds. In Standun, Inc. v. Fireman’s Fund Ins. Co. (1998) 62 Cal.App.4th 882, the court previously had held that the relevant discharge was that of wastes into a landfill, not the subsequent migration of wastes from the landfill to other property. Although the Standun court reached a different result, the Supreme Court noted that Standun’s approach “resembled [its] own,” as Standun’s result depended on identifying the discharge forming the basis for the insured’s liability. The court distinguished the underlying liability in this case from that in Standun, explaining that the policyholder in Standun was found liable for depositing waste directly onto land (not in containment pits), therefore precluding coverage, whereas here the State was “held liable for negligently selecting, designing, building, and operating the site.” Thus, the State’s liability “was based not on the release of wastes into the site . . . but on the release of wastes from the site when, because of the State’s negligence, the site failed to contain them properly.” The Court cited with the approval the decision in Shell Oil Co. v. Winterthur Swiss Ins. Co. (1993) 12 Cal. App. 4th 715, 783-84 in recognizing that in the “sudden and accidental” exception, “‘[a]ccidental’ means an unexpected or unintended discharge, not unexpected or unintended damage.” Thus, the court distinguished Standun, where pollutants were deposited directly onto the soil without any attempt at containment, and reasoned that in that case, further migration of pollutants may be reasonably viewed as an aspect of property damage and not as an additional release. Here, however, the hazardous wastes were deposited in containment ponds (which the State at least initially) expected to contain the wastes. The court concluded that the escape of pollutants from the containment ponds was the relevant discharge for purposes of the exclusion and to determine whether the discharge was both sudden, meaning abrupt (see Shell Oil), and accidental.
The court also addressed the burden of proving the amount of property damage caused by sudden and accidental discharges. The State admitted it could not differentiate the property damage caused by the 1969 and 1978 releases from that caused by the gradual leakage of wastes from the ponds. The trial court had ruled that the State could not recover anything, since it could not quantify the property damage caused by sudden and accidental releases. The insurers argued the same position, relying on Golden Eagle Refinery Co. v. Associated Internat. Ins. Co. (2001) 85 Cal.App.4th 1300, a case holding that an insured was not entitled to recover any sums because it could not quantify the damage resulting from sudden and accidental discharges.
The court found Golden Eagle to be inconsistent with its decision in State Farm Mut. Auto. Ins. Co. v. Partridge (1973) 10 Cal.3d 94, in which it concluded that “liability coverage exists ‘whenever an insured risk constitutes a proximate cause of an accident, even if an excluded risk is a concurrent proximate cause.’” The court disapproved Golden Eagle to the extent it held an insured must show how much of an indivisible amount of damages resulted from covered causes in addition to showing that a covered cause contributed substantially to the damages for which the insured was found liable. It instead agreed with previous decisions such as Travelers Cas. and Sur. Co. v. Superior Court (1998) 63 Cal.App.4th 1440, which held that coverage depended on “showing that an ‘appreciable amount’ of the environmental damage was caused by sudden and accidental events, over and above that caused by routine, intentional dumping.” The court clarified that upon making this showing, the insured must demonstrate that “a covered act or event was a substantial cause of the injury or property damage for which the insured is liable.”
The court further stated that “when the damages for which the insured is liable relate to distinct, divisible injuries or items of property damage, the insured has the burden of proving which of those are attributable to causes within the exclusion’s exception.” However, it noted that where the insured proves that multiple acts “concurred in causing a single injury (as in Partridge) or an indivisible amount of property damage . . . the insured’s inability to allocate the damages by cause does not excuse the insurer from its duty to indemnify.” The court explained that the insurer could “counter the insured’s evidence of indivisibility with its own evidence that damages are divisible and that only a limited portion of them resulted from covered events.” Finally, the court clarified that its holding did not extend to situations where the policyholder could only “speculate that some polluting events may have occurred suddenly and accidentally, or where sudden and accidental events have contributed only trivially to the property damage from pollution,” referencing cases holding against indemnity where the insured could only make unsubstantiated claims of sudden and accidental discharges. “Only if the insured can identify particular sudden and accidental events and prove they contributed substantially to causing indivisible property damage for which the insured bore liability is the insurer obliged to indemnify its insured for the entirety of the damages.”
The case was remanded for further proceedings consistent with the court’s opinion.
Contributor Karen Ventrell was trial counsel for an insurer in the landmark environmental insurance coverage action, Shell Oil Co. v. Winterthur Swiss Ins. Co.