Lead Opinion
Opinion
In this cause, we resolve two issues relating to standard commercial general liability insurance policies, which were formerly called comprehensive general liability insurance policies. The first question is whether site investigation expenses—broadly, expenses for determining the existence, nature, extent, effect, etc., of the discharge of hazardous substances at a location—may constitute defense costs that the insurer must incur in fulfilling its duty to defend. The second is whether defense costs may be allocated to the insured. As we shall explain, we conclude that, as to each, the answer is qualifiedly affirmative.
I
This is still another chapter in the yet-to-be-completed volume relating the story of Aerojet-General Corporation in Sacramento County. (See, e.g.,
In 1982, Transport Indemnity Company and Associated International Insurance Company (hereafter collectively Transport Indemnity) filed a complaint for declaratory relief in the Superior Court of San Mateo County, which was docketed under No. 262425, against, inter alios, numerous other insurers and their common insureds, Aerojet-General Corporation and its wholly owned subsidiary Cordova Chemical Company (hereafter collectively Aerojet), regarding the parties’ rights and duties under various comprehensive general liability and other insurance policies.
Aerojet, which had been represented by independent counsel since about 1979, filed a cross-complaint for declaratory and other relief against, inter alios, Transport Indemnity and other of its insurers—which, for convenience’s sake, will generally be referred to without differentiation as “the insurers.”
Aerojet later filed an amended cross-complaint—the one operative here— against 54 insurers, under 245 comprehensive general liability and other
In an opinion certified for publication, the Court of Appeal, First Appellate District, Division Five, granted a petition for writ of mandate submitted by Aerojet to compel the superior court to vacate an order granting a motion by the insurers for summary adjudication of certain issues and to enter a new and different order denying that motion. (Aerojet-General Corp. v. Superior Court, supra, 211 Cal.App.3d at pp. 220-238.) In effect, the superior court had summarily adjudicated that “response costs” under CERCLA, and similar costs under the Porter-Cologne Water Quality Control Act, could not constitute indemnification costs, i.e., expenses to resolve liability, that the insurers had to incur in fulfilling their duty to indemnify. The Court of Appeal concluded to the contrary. It therefore caused issuance of a peremptory writ of mandate as prayed. It did not consider whether costs of this sort could constitute defense costs, i.e., expenses to avoid or at least minimize liability.
Following entry of the dismissal without prejudice of the complaint by Transport Indemnity, the superior court effectively transformed Aerojet’s cross-action against the insurers into an action in and of itself, ordering Aerojet to be designated “plaintiff’ and not “cross-complainant” and the insurers to be designated “defendants” and not “cross-defendants.”
The superior court subsequently ordered the action to be tried in phases. Phase I would be tried to the court, and would concern issues such as: (1) the authenticity of certain policies purportedly issued to Aerojet by some of the insurers; (2) the existence and wording of certain other policies missing in whole or in part; (3) the meaning of all such policies; and (4) related questions. Phase II would be tried to a jury, and would concern issues such as the application of the policies proved to the evidence presented in order to determine whether the insurers had a duty to indemnify Aerojet. Phase III would be tried to the same jury, and would concern issues such as: (1) the sum that Aerojet was entitled to receive from the insurers as a result of any duty to indemnify; (2) inasmuch as Aerojet’s tender of the defense had by now been accepted by the insurers under certain reservations of rights, whether, and apparently in what amount, Aerojet was entitled to receive any additional payment for defense costs, and whether, and apparently in what amount, the insurers were entitled to obtain reimbursement for any such payment already provided; and (3) whether, and in what amount, the insurers were liable to Aerojet for so-called “bad faith” damages. Phase IV, if necessary, would be tried to the court, and would concern issues such as the allocation among the insurers of any sum determined to be owing to Aerojet.
Specifically, in phase IA, the superior court made determinations as to existence, authenticity, and wording. From 1956 to 1984, it appears, Aerojet had various comprehensive general liability insurance policies and similar instruments that are pertinent here.
In phase IB, the superior court made determinations as to meaning. By way of background: Prior to 1966, in its insuring clause the standard comprehensive general liability insurance policy covered specified harm, such as bodily injury or property damage, caused by “ ‘accident.’ ” (Croskey et al., Cal. Practice Guide: Insurance Litigation 2, supra, ^ 7:26, p. 7A-8 italics omitted.) In 1966, the form was revised in its insuring clause to cover specified harm caused by an “ ‘occurrence,’ ” which was defined as an “ ‘accident, including injurious exposure to conditions, which results during the policy period in’ ” harm of this sort “ ‘neither expected nor intended from the standpoint of the insured.’” (Id., H 7:28, p. 7A-9, italics omitted.) In 1973, the form was further revised: In its insuring clause, it continued to cover specified harm caused by an “ ‘occurrence,’ ” but now defined that term as an “ ‘accident, including continuous or repeated exposure to conditions, which results in’ ” harm of this sort “ ‘neither expected nor intended from the standpoint of the insured.’ ” (Id., ^ 7:29, p. 7A-9, italics omitted.) To return to the superior court’s determinations: Aerojet’s comprehensive general liability insurance policies and similar instruments largely conformed to the standard ones in applicable' aspects. The phrase “neither expected nor intended” was express in the insuring clause of some, reflecting Insurance Code section 533, which states that “[a]n insurer is not liable for a loss caused by the wilful act of the insured . . . .” The phrase was implied in the insuring clause of the rest, through operation of the same provision. The phrase incorporated a subjective standard as to “intent” but, under City of Carter Lake v. Aetna Cas. and Sur. (8th Cir. 1979)
At phase II, Aerojet and the insurers presented evidence relevant to the issue of the duty to indemnify. In substance, it was established that, throughout the course of its operations from the early 1950’s into the 1980’s, Aerojet discharged hazardous substances in an ongoing fashion at its Sacramento site and thereby caused pollution in and around that location. The superior court charged the jury on the duty to indemnify. In the course of passing on various motions, it had previously determined that there was no such duty for periods before 1956 or after 1979. (specifically, after July 14, 1979). It submitted the question to the jury whether there was any such duty for any period from 1956 to 1979. In pertinent part, it instructed that “Aerojet has no insurance coverage if’ specified harm “is expected or intended from the standpoint of Aerojet.” It defined “expected” objectively to “denote [] that the actor knew or should have known that there was a substantial probability that certain consequences would result from his or her acts or omissions.” By contrast, it defined “intended” subjectively to “denote[] that the actor desires the consequences of his act or believes that the consequences are substantially certain to follow.” The jury proceeded to return a unanimous verdict determining that there was no duty to indemnify for any period from 1956 to 1979.
At phase III, the issues to be tried to the jury were limited to a single one pursuant to a stipulation between Aerojet and certain of the insurers other than INA: “What sums, if any, expended by Aerojet for [site] investigation are defense costs?” In the stipulation, Aerojet and the insurers agreed, in pertinent part, to the following effect: In shares determined among themselves, the insurers had paid, or would pay, as defense costs the expenses that Aerojet had incurred, or would incur, under the categories of “legal” and “legal support” through the final disposition of any appeal Aerojet would
At the outset of phase III, the superior court ruled to the effect that, generally, site investigation expenses were not defense costs. It also ruled that defense costs could be allocated to the insured. Specifically, “Aerojet has held itself out to the world as insured by I.N.A.” under its “fronting” comprehensive general liability insurance policies. “Aerojet has elected not to buy insurance for defense costs from 1976 on.” “Under the court’s equitable powers, Aerojet is responsible for a co-equal allocation of the defense cost.”
Before the presentation of evidence at phase III, the superior court preinstructed the jury, in accordance with the ruling described above, as follows: “In this phase of the trial Aerojet seeks the costs it incurred to investigate the pollution at the Sacramento site as costs of defending the litigation filed against them by the governments and others. [^] All sums that Aerojet paid, one, because of government orders or requests to investigate, clean up or remediate, or, [1] two, because of Aerojet’s agreement or commitment to perform the Aerojet investigation, cleanup or remediation are indemnity expenses, and therefore not recoverable as defense costs. flO Investigation costs, such as investigating the extent of the contamination or the viability of cleanup options and monitoring the spread of the wastes from the site, which were incurred as part of Aerojet’s effort to clean up or remediate the site, are not considered defense .costs, ffl] If the costs involved here were necessary to or part of Aerojet’s effort to clean up and remediate the site, such costs are [not] defense costs, even if Aerojet’s lawyers used information developed during the investigation to assist them in negotiating with the governments to limit Aerojet’s obligations to clean up and to remediate. fi[] If any investigation costs did not relate to any of the purposes described above, but were incurred because they were specifically requested by a lawyer and were reasonable for the purpose of defending Aerojet in litigation, such investigation costs would be defense costs.”
After the presentation of evidence at phase III, the superior court instructed the jury with language virtually identical to that of the preinstruction quoted above.
Because the jury at phases II and III had determined that no sum was owing to Aerojet by the insurers, the superior court had no need to, and did not, proceed to phase IV, at which it would have resolved issues such as the allocation of any sum of this sort among the insurers.
The superior court then rendered what it denominated its “final judgment.” Previously, it had entered various judgments and orders related thereto. Subsequently, it would enter an order on the taxing of costs.
Aerojet filed a notice of appeal from the final judgment. The appeal was docketed in the Court of Appeal, First Appellate District, under No. A057812, and was assigned to Division Five thereof. Previously, Aerojet had filed a notice of appeal from the various judgments and orders related to the final judgment. This had been docketed in the First Appellate District under No. A053808, and had been assigned to Division Five. Subsequently, Aerojet would file a notice of appeal from the order on the taxing of costs. This would be docketed in the First Appellate District under No. A059976, and would be assigned to Division Five.
In an opinion certified for partial publication, the Court of Appeal, having effectively consolidated all three appeals for consideration and decision, affirmed the “final judgment,” the various judgments and orders related thereto, and the order on the taxing of costs, except as indicated below.
In part I of its discussion, which it did not certify for publication, the Court of Appeal reviewed phase I of the trial. Following Shell Oil Co. v. Winterthur Swiss Ins. Co. (1993)
In part II of its discussion, which it also did not certify for publication, the Court of Appeal reviewed phase II of the trial. In conformity with its holding
In part III of its discussion, which alone it certified for publication, the Court of Appeal reviewed phase III of the trial.
Specifically, in part III, the Court of Appeal concluded, inter alia, that the superior court erred by instructing the jury to the effect that Aerojet’s site investigation expenses were not defense costs to the extent that they were linked to orders or requests by the United States or the State of California. It held in substance as follows: Generally, site investigation expenses by an insured are defense costs to the extent that they are reasonable and necessary to avoid or at least minimize liability; AIU Ins. Co. v. Superior Court (1990)
In part III, the Court of Appeal also concluded that the superior court did not err in ruling that defense costs could be allocated to the insured. It held to this effect: because Aerojet agreed that it would pay its own defense costs under the “fronting” comprehensive general liability insurance policies issued by INA from 1976 to 1984, it “should now carry [its] fair share of the burden” pro rata based on the time of noninsurance within the time as a whole.
The Court of Appeal denied a petition for rehearing by Aerojet. On its own motion, it modified part II of its opinion, which was unpublished, simply to add a single sentence at the very end in order to “note the obvious—that [its] decision in [this part] is based on the specific facts of this case.” (Italics in original.)
On separate petitions by Aerojet and the insurers, we granted review. Pursuant to rule 29.2(b) of the California Rules of Court, we subsequently specified the issues to be argued as indicated in the introduction.
n
The issues to be resolved are whether, under standard comprehensive or commercial general liability insurance policies, site investigation expenses may constitute defense costs that the insurer must incur in fulfilling its duty to defend, and whether, under such policies, defense costs may be allocated
A
Standard comprehensive or commercial general liability insurance policies are contracts between an insurer and an insured: In each, the insurer makes promises, and the insured pays premiums, the one in consideration for the other, against the risk of loss. (E.g., Buss v. Superior Court (1997)
In pertinent part, standard comprehensive or commercial general liability insurance policies provide that the insurer has a duty to indemnify the insured for those sums that the insured becomes legally obligated to pay as damages for a covered claim. (E.g., Buss v. Superior Court, supra, 16 Cal.4th at p. 45.) By definition, this duty entails the payment of money (e.g., id. at p. 46), which is expressly limited in amount (see Croskey et al., Cal. Practice Guide: Insurance Litigation 2, supra, ¶ 7:354, p. 7A-76), in order to resolve liability (e.g., Buss v. Superior Court, supra,
Standard comprehensive or commercial general liability insurance policies also provide that the insurer has a duty to defend the insured in any
It is plain that the insurer’s duty to defend is broader than its duty to indemnify. (E.g., Buss v. Superior Court, supra,
Thus, in an action wherein all the claims are at least potentially covered because they may possibly embrace some triggering harm of the specified sort within the policy period caused by an included occurrence, the insurer has a duty to defend. (Buss v. Superior Court, supra, 16 Cal.4th at pp. 46-47.) “This obligation is express in the policy’s language. It rests on the fact that the insurer has been paid premiums by the insured for a defense. ‘The rule is grounded in basic principles of contract law.’ [Citation.] The duty to defend is contractual. [Citations.] ‘An insurer contracts to pay the entire cost of defending . . . claimfs]’ that are at least potentially covered.” (Id. at p. 47.)
By contrast, in an action wherein none of the claims is even potentially covered because it does not even possibly embrace any triggering harm of the specified sort within the policy period caused by an included occurrence, the insurer does not have a duty to defend. (Buss v. Superior Court, supra,
It follows that, in a “mixed” action, in which at least one of the claims is at least potentially covered and at least one of the claims is not, the insurer does not have a duty to defend the action in its entirety arising out of contract: It “has a duty to defend as to the claim[] that [is] at least potentially covered, having been paid premiums by the insured therefor, but does not have a duty to defend as to [the claim] that [is] not, having not been paid therefor.” (Buss v. Superior Court, supra, 16 Cal.4th at pp. 47-48.)
Nevertheless, the insurer has a duty to defend the entire “mixed” action imposed by law in support of the policy: “To defend meaningfully, [it] must
It is manifest that this analysis applies, as it were, not only between claims but also between parts of a single claim.
Thus, when all the parts of a claim are at least potentially covered because each may possibly embrace some triggering harm of the specified sort within the policy period caused by an included occurrence, the insurer has a duty to defend. It has “ ‘contracted] to pay the entire cost of defending’ ” a claim of this sort. (Buss v. Superior Court, supra,
By contrast, when none of the parts of a claim is even potentially covered because it does not even possibly embrace any triggering harm of the specified sort within the policy period caused by an included occurrence, the insurer does not have a duty to defend. It “ ‘has not contracted to pay defense costs’ ” for a claim of this sort. (Buss v. Superior Court, supra,
It follows that, as to a “mixed” claim, in which at least one of the parts is at least potentially covered and at least one of the parts is not, the insurer does not have a contractual duty to defend the claim in its entirety.
Nevertheless, the insurer has a prophylactic duty to defend the entire “mixed” claim. That is because to defend meaningfully, it must defend immediately, and to defend immediately, it must defend entirely.
B
The first issue on review concerns whether, under standard comprehensive or commercial general liability insurance policies, site investigation expenses may constitute defense costs that the insurer must incur in fulfilling its duty to defend.
The insurer has a duty to defend. In fulfilling its duty, it must undertake reasonable and necessary efforts to avoid or at least minimize liability. To that end, it must incur reasonable and necessary costs. All this it must do from as early as tender of the defense through as late as conclusion of the action.
It follows that the insured’s site investigation expenses constitute defense costs that the insurer must incur in fulfilling its duty to defend if,
Thus, if and to the extent that the insured’s site investigation is conducted within the temporal limits of the insurer’s duty to defend and amounts to a reasonable and necessary effort to avoid or at least minimize liability, the related site investigation expenses may possibly be defense costs that the insurer must incur in fulfilling its duty to defend. If and to the extent that these site investigation expenses are reasonable and necessary for that purpose, they are in fact defense costs that the insurer must incur in fulfilling its duty to defend; but if and to the extent that they are not, they are not. By contrast, if and to the extent that the site investigation is not conducted within the temporal limits of the insurer’s duty to defend or does not amount to a reasonable and necessary effort to avoid or at least minimize liability, the related site investigation expenses cannot even possibly be defense costs that the insurer must incur in fulfilling its duty to defend.
Not to the contrary is AW Ins. Co. v. Superior Court, supra,
Whether the insured’s site investigation expenses are defense costs that the insurer must incur in fulfilling its duty to defend must be determined objectively, and not subjectively from the viewpoint of either the insurer or the insured.
Specifically, whether the site investigation is conducted by the insured within the temporal limits of the insurer’s duty to defend must be assessed under an objective standard. What matters is whether the site investigation actually occurs between tender of the defense and conclusion of the action, not whether it is honestly believed to occur.
Whether the insured’s site investigation amounts to a reasonable and necessary effort to avoid or at least minimize liability must also be assessed under an objective standard. What matters here is whether the site investigation would be conducted against liability by a reasonable insured under the same circumstances. Were it not, the question would require a discernment of motive. Why is the insured conducting the site investigation at issue? to resist liability? for that reason and some other? for a reason altogether different? “Motive, however, is ‘hard ... to discern.’ ” (Buss v. Superior Court, supra,
Lastly, whether the insured’s site investigation expenses are reasonable and necessary to avoid or at least minimize liability must be assessed under an objective standard as well. What matters here is whether the site investigation expenses would be incurred against liability by a reasonable insured under the same circumstances. Were it not, this question too would require a discernment of motive. Why is the insured incurring the site investigation expenses at issue? to resist liability? for that reason and some other? for a reason altogether different? “Motive,” again, “is ‘hard ... to discern.’ ” (Buss v. Superior Court, supra,
All this is true even in the general context of a governmental request or order for the insured to conduct a site investigation and/or to incur site investigation expenses. Otherwise, the questions whether the insured’s site investigation is reasonable and necessary to avoid or at least minimize liability and whether its site investigation expenses are reasonable and necessary for that purpose would require a difficult discernment of motive. Why is the insured conducting the site investigation in question and why is it incurring the site investigation expenses at issue? to resist liability? to satisfy the government without regard to consequences? for an altogether different reason? or, most plausibly, both to resist liability and to satisfy the government?
All this is also true even in the specific context of an order or request for a Remedial Investigation/Feasibility Study or RI/FS under CERCLA by the United States. The federal government may require or ask for such a study. (See 42 U.S.C. § 9604(a)(1).) It may conduct the study itself. (See ibid.) If it does, it may compel the insured to reimburse it for the cost thereof. (42 U.S.C. § 9607(a).) The insured may be allowed to conduct the study if it is determined to be qualified to do so, if it is subjected to federal government oversight and review, and if it agrees to make reimbursement for the cost of such oversight and review. (42 U.S.C. § 9604(a)(1).) It is well known that, by conducting the study itself, the insured may be able to avoid or at least minimize liability—both for the costs of the study and for any costs subsequent thereto (see, e.g., Aetna Cas. and Sur. Co., Inc. v. Pintlar Corp. (9th Cir. 1991)
Finally, on the question whether the insured’s site investigation expenses are defense costs that the insurer must incur in fulfilling its duty to defend, there arises the issue of the burden of proof.
In the general case, it is the insured that must carry the burden of proof on the existence, amount, and reasonableness and necessity of the site investigation expenses as defense costs, and it must do so by the preponderance of the evidence. “Evidence Code section 500 provides that, generally, a party desiring relief must carry the burden of proof thereon.” (Buss v. Superior Court, supra,
By contrast, in the exceptional case, wherein the insurer has breached its duty to defend, it is the insured that must carry the burden of proof on the existence and amount of the site investigation expenses, which are then presumed to be reasonable and necessary as defense costs, and it is the insurer that must carry the burden of proof that they are in fact unreasonable or unnecessary. (Accord, Fireman’s Fund Ins. Companies v. Ex-Cell-O Corp. (Ex-Cell-O II), supra,
It follows that Aerojet’s site investigation expenses may constitute defense costs that the insurers must incur in fulfilling their duty to defend. From 1956 to about 1975, Aerojet had largely typical comprehensive general liability insurance policies and similar instruments, covering specified harm
The insurers argue against the foregoing conclusion. They fail to persuade.
For example, the insurers imply that site investigation and site investigation expenses are peculiar to hazardous substance discharge claims. That may be true. But it does not mean, as they apparently suppose, that site investigation cannot amount to a reasonable and necessary effort to avoid or at least minimize liability or that site investigation expenses cannot be reasonable and necessary for that purpose. Factually, a hazardous substance discharge claim may be sui generis. Legally, however, it is not unique. The insurers maintain that the governmental actions were different from others: They were not litigated, they did not seek a judgment; rather, they were negotiated, they aimed at settlement. The governmental actions may have been unlike others in degree. But not in kind. Many actions involve negotiation rather than litigation; many look toward settlement rather than judgment. What matters is the legal “essence,” as it were, of any site investigation and any site investigation expenses, and not their factual “accidents.”
In addition, the insurers assert that the insured will have carte blanche to pronounce any “site investigation expenses” to be defense costs, provided only that the insured entertains an honest belief—or persuasively says it entertains an honest belief—that they are. Not so. The standard is objective, not subjective.
Further, the insurers imply that site investigation expenses may be included within “response costs” under CERCLA. That may be true. But it does not mean, as they apparently suppose, that site investigation expenses cannot be defense costs. For instance, the insured’s site investigation expenses for identifying the hazardous substance discharged may be “response costs” insofar as they promote removal and remediation, by enabling it to determine how to neutralize the substance in question. They may also be defense costs insofar as they are reasonable and necessary to avoid or at least minimize liability, by making it possible for it to show that it was not in fact
Also, the insurers assume that site investigation expenses cannot be defense costs to the extent that the underlying site investigation is ordered or requested by the federal or state government or, it seems, by any other person or entity. Their premise is, apparently, that the effort undertaken by a party in defending itself must be voluntary, as for example initiated and controlled by the party itself. It is unsound. (See Hi-Mill Mfg. Co. v. Aetna Cas. & Sur. Co. (E.D.Mich. 1995)
Contrariwise, the insurers assume that site investigation expenses cannot be defense costs to the extent that the underlying site investigation is “agreed” or “committed” to by the insured. Their premise is, apparently, that the effort undertaken by a party in defending itself must be involuntary. It is unsound. As stated, what matters is what is done, not why.
Next, the insurers assert that, if site investigation expenses may constitute defenses costs, so may settlement costs—a result they say is untenable. Again, not so. Site investigation expenses may be defense costs because they may be reasonable and necessary to avoid or at least minimize liability. Settlement costs cannot be defense costs because, instead, they resolve liability.
Finally, the insurers imply that the standard for determining whether the insured’s site investigation expenses constitute defense costs is not a “bright line” rule and hence will encourage needless litigation. To our mind, the test is clear. It is certainly as clear as the law allows. All must proceed as best they can.
By giving an affirmative answer to the question whether site investigation expenses may constitute defense costs that the insurer must incur in fulfilling its duty to defend, the Court of Appeal did not err. Surely, it was right to hold prejudicially erroneous the superior court’s instruction to the jury to the effect that Aerojet’s site investigation expenses did not constitute defense
In answering the question of site investigation expenses as it did, the Court of Appeal erred to the extent that it chose to adopt the approach of the federal district court in Ex-Cell-O I (Fireman’s Fund Ins. Companies v. Ex-Cell-O Corp., supra,
C
The second issue on review concerns whether, under standard comprehensive or commercial general liability insurance policies, defense costs may be allocated to the insured.
The insurer has a duty arising out of the policy as a contract to defend as to a claim, or a part of a claim, that is at least potentially covered because it may possibly embrace some triggering harm of the specified sort within the policy period caused by an included occurrence. It has been held
By contrast, the insurer does not have a duty arising out of the policy as a contract—but may have one imposed by law in support thereof—to defend as to a claim, or a part of a claim, that is not even potentially covered because it does not even possibly embrace any triggering harm of the specified sort within the policy period caused by an included occurrence. It has been held that, under principles of the law of restitution, the insurer may obtain reimbursement from the insured for defense costs that can be allocated solely to a claim that is not even potentially covered: “With regard to defense costs” of this sort, “the insurer has not been paid premiums by the insured. It did not bargain to bear these costs. To attempt to shift them would not upset the arrangement. [Citation.] The insurer therefore has a right of reimbursement that is implied in law as quasi-contractual . . . .” (Buss v. Superior Court, supra, 16 Cal.4th at pp. 50-51.) Implicit in this holding is the proposition that the insurer may obtain reimbursement from the insured for defense costs that can be allocated solely to a part of a claim that is not even potentially covered. It follows that, pursuant to quasi-contract, defense costs that can be allocated solely to a claim, or a part of a claim, that is not even potentially covered can be allocated to the insured.
On the allocation of defenses costs to the insured, it is the insurer that must carry the burden of proof, and it must do so by the preponderance of the evidence. What we said above we say here: “Evidence Code section 500 provides that, generally, a party desiring relief must carry the burden of proof thereon,” and “Evidence Code section 115 .. . provides that the burden of proof that is generally applicable is proof by a preponderance of the evidence.” (Buss v. Superior Court, supra,
In the case at bar, the record on appeal discloses this: From 1956 to about 1975, Aerojet had largely typical comprehensive general liability insurance policies and similar instruments, covering specified harm including bodily injury and/or property damage, that were issued by various
Aerojet argues against the foregoing conclusion. It fails to persuade. It does not take any account of the fact that the insurer’s duty to defend the entire “mixed” claim is prophylactic and not contractual.
The insurers also argue against the foregoing conclusion. They too fail to persuade.
Generally, the insurers assume that their contractual duty to defend is limited to only that part of a “mixed” claim that comes within a policy period because specified harm may possibly have been caused by an included occurrence therein. They are wrong. As explained above, the duty to defend embraces all the parts of such a claim in which some such harm may possibly have resulted, whether within the policy period or beyond.
More specifically, the insurers imply that they may allocate defense costs to Aerojet more broadly, apparently based on the “fronting” policies issued by INA to Aerojet, or at least on the fact that Aerojet chose to avail itself of such policies. They are wrong here as well. Whatever duty to defend each may have had was provided for in its own policy or policies, and was not affected by Aerojet’s subsequent agreement to pay its own defense costs, and indeed defend itself, under INA’s. At bottom, their reasoning seems as
It bears repeating: If specified harm may possibly have been caused by an included occurrence and may possibly have resulted, at least in
By giving an affirmative answer to the question whether defense costs may be allocated to the insured, the Court of Appeal did not err.
In answering the question of allocation of defense costs as it did, the Court of Appeal erred to the extent that it strayed away from the contractual/quasi-contractual analysis set out above in the direction of vague “fairness” and rough “justice.”
The Court of Appeal expressed the view that the “logical conclusion” of such contractual/quasi-contractual analysis “would permit [Aerojet] to have been fully insured, for example, with Transport Indemnity ... for only 1 year out of the 30 years at issue here, then to have carried the subject INA policies for the remaining 29 years but claim a defense from Transport Indemnity for the entire 30-year period.”
The Court of Appeal stated that, under its illustration, Aerojet would not have a right to a defense by Transport Indemnity against an entire claim of bodily injury or property damage spanning all 30 years. It implied that 29/ao of the defense costs would have to be allocated to Aerojet, in the apparent belief that “ ‘. . . the insured must bear its share of those costs determined by the fraction of the time of injurious exposure in which it lacked coverage^] ’ ” (Quoting Gulf Chemical & Metallurgical v. Associated Metals, supra,
As also explained, even though in the Court of Appeal’s illustration Transport Indemnity might indeed be able to allocate defense costs to Aerojet, it would be able to do so only as to the part of the claim that was not even potentially covered. It would not be able to do so in accordance with any mechanical pro rata formula based on the time of noninsurance within the time as a whole. Especially so, because, contrary to the assumption, the duty to defend is not limited to the policy period.
Lastly, even though in the Court of Appeal’s illustration Aerojet may be said to have “assumed the risk of defending against claims” during year two through year thirty—strictly speaking, it simply did not shift the risk to another
Beneath the Court of Appeal’s concern about “fairness” and “justice” is, apparently, a belief that, without an approach like the one it adopted, Aerojet might get a windfall from the insurers. That is not the case. We shall assume for argument’s sake that Aerojet has enjoyed great good luck over against the insurers. But the pertinent policies provide what they provide. Aerojet and the insurers were generally free to contract as they pleased. (Linnastruth v. Mut. Benefit etc. Assn. (1943)
For the reasons stated above, we conclude that we must affirm in part and reverse in part the judgment of the Court of Appeál. Specifically, we must: (1) affirm the judgment to the extent that it holds that site investigation expenses may constitute defense costs that the insurer must incur in fulfilling its duty to defend under standard comprehensive or commercial general liability insurance policies; (2) affirm the judgment to the extent that it holds that defense costs may be allocated to the insured under such policies; (3) reverse the judgment to the extent that it holds that such costs should be allocated pro rata based on the time of noninsurance within the time as a whole; (4) otherwise affirm the judgment; and (5) direct the Court of Appeal to remand the cause to the superior court for proceedings not inconsistent with the views expressed in this opinion.
It is so ordered.
George, C. J., Werdegar, J., and Brown, J., concurred.
Notes
As would subsequently appear, Aerojet’s policies included “manuscript” as well as “standard” ones. Policies “are usually issued on standard forms containing terms and conditions drafted by the [insurer]. Often, the insurer is willing to modify or change the standard forms by ‘endorsements’ .... Sometimes, the policy issued is entirely nonstandard and drafted for the particular risk undertaken”—a so-called “manuscript” policy. (Croskey et al., Cal. Practice Guide: Insurance Litigation 1 (The Rutter Group 1997) 3:33, p. 3-6.)
Under CERCLA, the terms “removal” and “remediation” bear the following meanings. “Removal” refers to the “cleanup. or removal of released hazardous substances from the environment, such actions as may be necessary taken in the event of the threat of release of hazardous substances into the environment, such actions as may be necessary to monitor, assess, and evaluate the release or threat of release of hazardous substances, the disposal of removed material, or the taking of such other actions as may be necessary to prevent, minimize, or mitigate damage to the public health or welfare or to the environment, which may otherwise result from a release or threat of release.” (42 U.S.C. § 9601(23).) “Remediation” refers to “those actions consistent with permanent remedy taken instead of or in addition to removal actions in the event of a release or threatened release of a hazardous substance into the environment, to prevent or minimize the release of hazardous substances so that they do not migrate to cause substantial danger to present or future public health or welfare or the environment.” {Id., § 9601(24).)
A “fronting” policy has been described as one “which does not indemnify” or, apparently, defend “the insured but which is issued to satisfy financial responsibility laws of various”
“[I]f there is a conflict in meaning between an endorsement and the body of the policy, the endorsement controls.” (Continental Cas. Co. v. Phoenix Constr. Co. (1956)
See footnote 4, ante.
A proposed consent decree, which incorporated an earlier agreement, had been lodged with the federal and state CERCLA complaints in 1986, and had subsequently been withdrawn.
In the words of section 300.430(a)(2), which was subsequently added to title 40 of the Code of Federal Regulations: “The purpose of the remedial investigation/feasibility study (RI/FS) is to assess site conditions and evaluate alternatives to the extent necessary to select a remedy. Developing and conducting an RI/FS generally includes the following activities: project scoping, data collection, risk assessment, treatability studies, and analysis of alternatives.” (55 Fed.Reg. 8666, 8846 (Mar. 8, 1990); accord, 40 C.F.R. § 300.430(a)(2) (1996).)
The County of San Bernardino et al., which have been granted leave to appear as amici curiae supporting Aerojet’s position, have submitted a request for judicial notice of the following commentaries: (1) Elliott, The New Comprehensive General Liability Policy (American Management Association Reprint 1966); and (2) Obrist, The New Comprehensive General Liability Insurance Policy—A Coverage Analysis (Defense Research Inst. Monograph 1966). We deny the request. We may take judicial notice only of matter that is “authorized or required by law.” (Evid. Code, § 450.) The indicated commentaries are not such. (See id.., §§451, 452.) They may nevertheless be consulted for whatever assistance they may furnish. So they were in the past, in decisions including Montrose Chemical Corp. v. Admiral Ins. Co. (1995)
As stated, prior to 1966, in its insuring clause the standard comprehensive general liability insurance policy covered specified harm, such as bodily injury or property damage, caused by “accident” rather than by an “occurrence.” (Croskey et al., Cal. Practice Guide: Insurance Litigation 2, supra, ¶ 7:26, p. 7A-8.) As pertinent here, the difference in words does not reflect any difference in substance. (See id., ‘JH 7:25 to 7:32, pp. 7A-8 to 7A-10.)
In Montrose Chemical Corp. v. Admiral Ins. Co., supra,
In Montrose, we also made plain that “successive” insurers “on the risk when continuous or progressively deteriorating [property] damage or [bodily] injury first manifests itself’ are separately and independently “obligated to indemnify the insured”: “[W]here successive . . . policies have been purchased, bodily injury and property damage that is continuing or progressively deteriorating throughout more than one policy period is potentially covered by all policies in effect during those periods.” (Montrose Chemical Corp. v. Admiral Ins. Co., supra, 10 Cal.4th at pp. 686-687.) The successive insurers are not “jointly and severally liable.” (Id. at p. 681, fn. 19, italics omitted.) Rather, “[a]llocation of the cost of indemnification” among such insurers “requires application of principles of contract law to the express terms and limitations of the various policies” (ibid.) and, in their absence, “equitable considerations” (id. at p. 687).
See footnote 10, ante.
Pace Justice Kennard, who in her concurring and dissenting opinion essentially adheres to views that we previously considered and found wanting. (Compare Buss v. Superior Court, supra, 16 Cal.4th at pp. 44-49 with id. at pp. 62-66 (dis. opn. of Kennard, J.).)
At least as a general matter, under the analysis presented in the text, the costs that the insurer must incur in fulfilling its duty to indemnify and the costsjhat it must incur in fulfilling its duty to defend are mutually exclusive. Indemnification costs, i.e., expenses to resolve liability, are expressly limited in the policy. They arise after the insured’s liability is established and as a result thereof. That is because indemnification presupposes that such liability has actually been established in the past. (See Montrose Chemical Corp. v. Admiral Ins. Co., supra,
In General Acc. Ins. Co. v. State Dept. of Environ. (1996)
Insofar as the insurers’ assumption that site investigation expenses cannot be defense costs to the extent that the underlying site investigation is ordered or requested by the federal or state government is based on the premise that such expenses are indemnification costs within the meaning of AIU Ins. Co. v. Superior Court, supra,
In General Acc. Ins. Co. v. State Dept. of Environ., supra,
In Endicott Johnson Corp. v. Liberty Mut. Ins. Co. (N.D.N.Y. 1996)
In stating that Aerojet agreed to pay its own defense costs and indeed to defend itself, we merely follow the language of the “fronting” policies. Of course, Aerojet did not “contract” with itself to impose an “obligation” on itself.
Or, similarly, by “accident,” etc. (See fn. 9, ante.)
Each may also have had a corresponding right of some sort to require the others to share in discharging the duty or at least to contribute to its costs. (See generally, Croskey et al., Cal. Practice Guide: Insurance Litigation 2, supra, ¶¶ 8:73.10 to 8:73.19, pp. 8-17 to 8-22 [surveying the topic]; see also Haskel, Inc. v. Superior Court (1995)
In a strict sense, “self-insurance” is a “misnomer.” (Nabisco, Inc. v. Transport Indemnity Co. (1983)
We find nothing contrary in City of Oxnard v. Twin City Fire Ins. Co. (1995)
Following decisions such as Ins. Co. North America v. Forty-Eight Insulations (6th Cir. 1980)
To the extent that they state or imply otherwise, such decisions as Ins. Co. North America v. Forty-Eight Insulations, supra, 633 F.2d at pages 1224 to 1225, and its progeny including Sharon Steel v. Aetna Cas. and Sur., supra, 931 P.2d at pages 140 to 142, Owens-Illinois, Inc. v. United Ins. Co., supra,
The result might be different if the standard comprehensive or commercial general liability insurance policy were a kind of “claims made” policy. (See Montrose Chemical Corp. v. Admiral Ins. Co., supra, 10 Cal.4th at pp. 688-689.) Under a policy of this sort, “the insurer generally is responsible for loss resulting from claims made during the policy period”—and only for loss resulting from claims made during the policy period—“no matter when the liability-generating event took place.” (Helfand v. National Union Fire Ins. Co. (1992)
Aerojet was effectively uninsured, not “self-insured.” (See fn. 20, ante.)
We are consequently in accord with decisions that have resisted temptation in this regard, such as Armstrong World Industries, Inc. v. Aetna Casually & Surety Co., supra, 45 Cal.App.4th at pages 55 to 57, and Keene Corp. v. Ins. Co. of North America (D.C. Cir. 1981)
We therefore cannot, and will not, follow courts that do, such as the New Jersey Supreme Court in Owens-Illinois, Inc. v. United Ins. Co., supra, 138 N.J. at pages 474 to 480 [650 A.2d at pages 993-996].
In Owens-Illinois, Inc. v. United Ins. Co., supra, 138 N.J. at pages 474 to 480 [650 A.2d at pages 993-996], a case involving asbestos, the New Jersey Supreme Court all but conceded as much. It declined to amass and analyze the pertinent empirical data itself in favor of directing the trial court, at page 477 [
We observe that Aerojet may indeed have gotten from the insurers more in defense costs than it could have gotten in indemnification costs. But it got no more than it had a right to: Although indemnification costs were limited by the pertinent policies, defense costs were not. The insurers might perhaps have avoided such a pass, as through the issuance of “self-consuming” or “burning limits” policies, under which the indemnification limit is reduced dollar for dollar by defense costs until zero is reached and the duty to indemnify and the duty to defend are then terminated (see Croskey et al., Cal. Practice Guide: Insurance Litigation 2, supra, ¶ 7:656, p. 7B-34). They apparently did not attempt to do so.
The insurers may be understood to argue that, if the same costs may be characterized as both indemnification costs and defense costs, they should be characterized as the former rather than the latter.
At least as a general matter, as we have explained, indemnification costs and defense costs are mutually exclusive: The latter are expenses to avoid or at least minimize liability that arise before the insured’s liability is established and apart therefrom; the former are expenses to resolve liability that arise after the insured’s liability is established and as a result thereof. Hence, at least as a general matter, the same costs cannot be characterized as both. In any event, they should not be characterized as the former rather than the latter, as it were, by default. No basis exists therefor in the pertinent policies. None shall be created here. (See Domtar, Inc. v. Niagara Fire Ins. Co., supra, 563 N.W.2d at pp. 738-739 [applying Minnesota law, but speaking generally, to the effect that, even if the same costs could be characterized as both indemnification costs and defense costs, they should not be characterized as the former rather than the latter: that the same costs may do double duty as both indemnification costs and defense costs means that they do, in fact, do duty as the latter as well as the former].)
In her concurring and dissenting opinion, in which she invokes the public policy underlying Insurance Code section 533 not to encourage “wilful acts” on the part of the insured by prohibiting indemnification by the insurer for any liability based thereon (e.g., Horace Mann Ins. Co. v. Barbara B. (1993)
Concurrence in Part
In this case, the majority addresses three issues concerning the rights and duties of insurer and insured under a standard commercial general liability (CGL) insurance policy when the insured has been sued for progressive property damage or personal injury caused by toxic pollution. In my view, the majority decides only one of these issues correctly.
The first issue that the majority addresses is whether site investigation costs—that is, costs incurred to determine the origin, nature, and extent of toxic pollution and the most appropriate remedial measures—are defense costs that the insurer must incur in fulfilling its duty to defend. Starting from the premise that defense costs and indemnity costs are mutually exclusive, the majority concludes that site investigation costs are defense costs rather than indemnity costs when the site investigation is conducted “within the temporal limits of the insurer’s duty to defend” and “amount[s] to a reasonable and necessary effort to avoid or at least minimize liability,” provided that the claimed expenses are “reasonable and necessary for that purpose.” (Maj. opn., ante, at pp. 60-61.)
In the first situation, in which it is ultimately determined, by judgment or settlement, through site investigation or otherwise, that the insured has no liability for toxic pollution, the absence of liability means-that there are no indemnity costs. In this situation, all site investigation costs reasonably incurred as part of the ultimately successful effort to avoid liability should be treated as defense costs that the insurer must pay under its duty to defend. In the second situation, in which it is ultimately determined that the insured is a toxic polluter but one who did not expect or intend the resulting harm, the duty to defend requires the insurer to pay site investigation costs reasonably incurred to avoid or minimize liability, but if those same costs also serve to discharge the insured’s cleanup liability, then they also constitute indemnity costs that the insurer may credit against the liability limits of the policy. In the third situation, in which it is ultimately determined that the insured is a toxic polluter who expected or intended the resulting harm, the public policy against indemnity for willful wrongs must be considered in deciding whether the insurer is obligated to pay site investigation costs. To the extent that site investigation serves to discharge the insured’s cleanup liability, this public policy requires that the insured rather than the insurer bear those cleanup costs.
The second issue that the majority addresses is whether, when the insurer has incurred costs in the defense of what the majority terms a “mixed claim,” meaning a claim having parts that are potentially covered and parts that are not potentially covered, the insurer may obtain reimbursement from the insured for defense costs that may be allocated solely to parts of the claim that are not potentially covered. The majority decides that an insurer may obtain reimbursement from the insured for such costs, treating this issue as controlled by this court’s recent decision in Buss v. Superior Court (1997)
The third issue concerns equitable allocation of defense costs among insurers having defense obligations that overlap because each insurer afforded coverage during part of the time when a progressive property damage
I
Since 1951, Aerojet-General Corporation (Aerojet) has operated a large facility near Sacramento to develop and produce missile and rocket motors under government contracts. Between 1956 to 1984, the time period relevant here, Aerojet purchased liability coverage under a series of CGL policies issued by various insurers. Between 1976 and 1984, Aerojet purchased “cash flow” or “fronting” policies from Insurance Company of North America (INA). These policies contained endorsements that shifted to Aerojet the ultimate cost of both indemnification and defense.
In 1979, it was discovered that the groundwater beneath and around Aerojet’s Sacramento facility had been contaminated with trichloroethylene (TCE), a chemical solvent that Aerojet had used in large quantities. Discovery of the TCE pollution led the federal and state governments and various private parties to sue Aerojet, which sought indemnification and defense from its liability insurers. The insurers (except INA) provided a defense but reserved their rights to dispute indemnity coverage.
Several insurers commenced this action by filing a complaint for declaratory relief to clarify their obligations under the CGL policies they had issued to Aerojet. Aerojet cross-complained against all the insurance companies that had issued CGL policies to it between 1956 and 1984. The insurers’ complaint eventually was dismissed without prejudice, and the case went to trial on Aerojet’s cross-complaint. The action was tried in three phases. In the first phase, the trial court construed the relevant disputed language of the insurance policies. In the second phase, the jury applied the policy language as construed by the trial court to the evidence presented. Specifically, it applied the standard CGL policy language limiting the insurers’ obligations to harm that was “neither expected nor intended from the standpoint of the insured,” and the jury concluded that there was no indemnity coverage for the damages occasioned by the TCE pollution because Aerojet had expected or intended the harm caused by that pollution.
During the third phase of the trial, the jury determined that costs of government-mandated site investigations were not defense costs, and therefore the insurers were not required to pay these costs to discharge their duty to defend. The trial court entered judgment against Aerojet on its cross-complaint. Aerojet appealed, raising issues relating to each of the three phases of the trial.
The Court of Appeal concluded that although the trial court had committed certain errors in the first and second phases of the trial, Aerojet had not been prejudiced by these errors in light of the overwhelming evidence that Aerojet knew both that TCE was a highly toxic and harmful pollutant and that its disposal practices were causing TCE pollution of the groundwater. Thus, the Court of Appeal upheld the jury verdict at the second phase that, because Aerojet had expected or intended the harm caused by the TCE pollution, the insurers had no indemnity obligation.
As for the third phase, the Court of Appeal reached these conclusions: (1) The jury’s finding that none of the site investigation expenses were defense costs was prejudicially affected by erroneous instructions; and (2) liability for defense costs should be equitably apportioned among the various insurers, and in this apportionment Aerojet should also bear á reasonable share because it chose to be self-insured for defense costs, by means of the INA “fronting” policies, for part of the time during which the harm was occurring. The Court of Appeal reversed the judgment as to the third phase only and remanded for a limited new trial.
Aerojet petitioned this court for review, raising several issues. Three of the insurance carriers also petitioned for review, raising only the issue
II
The standard CGL policy defines the insurer’s indemnity obligation as the duty to pay “all sums that the insured becomes legally obligated to pay as damages” as a result of personal injury or property damage or other covered risk, provided that the damages are to compensate for harm that was “neither expected nor intended from the standpoint of the insured.” In AIU Ins. Co. v. Superior Court (1990)
Apart from its duty to indemnify, an insurer under a CGL policy has a duty to defend the insured in any “suit” seeking damages potentially within the policy’s indemnity coverage. (See Buss v. Superior Court, supra,
In a standard CGL policy, indemnity coverage is subject to dollar limits specified in the policy, but defense coverage is not subject to any specified dollar limit. Otherwise stated, the policy’s monetary limits have no application to defense costs.
Under CERCLA, once a federal agency identifies a suspected polluter (referred to in CERCLA as a “potentially responsible party” or PRP), the agency may require the PRP to conduct a site investigation (which CERCLA
Because the results of the RI/FS can be used to demonstrate that there is no toxic pollution, that a PRP is not the source of the pollution, or that the pollution is less severe or less extensive than claimed, or to demonstrate the feasibility of cleanup methods less costly than those the agency might otherwise have demanded, Aerojet and other insureds claim that the costs of the RI/FS are entirely defense costs that their insurers must pay. If the costs are treated only as defense costs, they do not count against the policy limits. This is critical in a case like this one, in which some $26 million has been spent on site investigation, including the RI/FS.
The majority states that an insurer, to discharge its duty to defend, “must undertake reasonable and necessary efforts to avoid or at least minimize liability” and for this purpose “must incur reasonable and necessary costs.” (Maj. opn., ante, at p. 60.) From these simple and indisputable propositions, the majority concludes that site investigation expenses are defense costs, and not indemnity costs, whenever the site investigation is “conducted within the temporal limits of the insurer’s duty to defend” and amounts “to a reasonable and necessary effort to avoid or at least minimize liability,” provided only that the particular expense incurred is “reasonable and necessary for that purpose.” (Id. at pp. 60-61.)
The majority states that this court’s decision in AIU Ins. Co. v. Superior Court, supra,
In a footnote, the majority states that defense costs and indemnity costs are mutually exclusive and that the same cost cannot be both an indemnity cost and a defense cost. (Maj. opn., ante, at p. 61, fn. 13.) The majority distinguishes the two by stating that indemnity costs “arise after the insured’s liability is established and as a result thereof’ whereas defense costs “arise before the insured’s liability is established and apart therefrom.” (Ibid.)
First, the majority is wrong in its assertion that defense costs and indemnity costs are mutually exclusive and may be readily distinguished by determining whether the cost was incurred before or after the insured’s liability was established. The majority assumes that in every situation that may arise under a CGL policy, there is a single point in time when the insured’s liability is fixed, so that expenses incurred after that point cannot be defense costs (because there is no longer anything to defend) while expenses incurred before that point cannot be indemnity costs (because there was not yet a liability to discharge). But defense and indemnity costs are not so easily separated. In particular, it frequently happens that an insured will admit the fact of liability but dispute the amount or extent of that liability. Here, for example, Aerojet conceded at an early stage that it was the source of the TCE pollution around its Sacramento facility, and it agreed in principle to pay the costs of cleanup; thereafter, the dispute shifted to issues such as the extent of the pollution and the most cost-effective method of cleanup. After conceding the fact of liability, and while disputing the extent of liability, an insured may incur costs that are defense costs as well as indemnity costs because they are incurred for diagnostic or other services that operate both to reduce and to discharge liability. In the context of a CERCLA enforcement action, an RI/FS may serve these dual purposes. In the context of a personal injury claim, the cost of a medical diagnostic procedure may likewise be both a defense cost and an indemnity cost because the procedure may both show that the injury is less serious (and thus the insured’s potential liability is less costly) than claimed and also constitute a necessary and integral part of the treatment for the injury. In brief, a single expense may qualify as an indemnity cost because it serves to partially discharge the insured’s liability and as a defense cost because it assists, or could assist, in limiting the scope of the insured’s liability.
The majority’s “temporal limits” approach, under which defense costs and indemnity costs are mutually exclusive and the categorization of a particular cost is determined by reference to whether it was incurred before or after liability was fixed, cannot be applied successfully to the complex situations that arise under CGL policies. Toxic pollution cases are particularly resistant to this approach because the actual monetary cost of the polluter’s liability is rarely fixed in advance, but is usually determined retrospectively, after the cleanup is finished. If the tab is totaled only at the end, there is room to argue that costs incurred at every step of the process are defense costs because they may reduce subsequent cleanup costs by demonstrating that there are cheaper cleanup methods than those advocated by the government, that the methods used have been effective, or that the pollution is actually
The second global defect in the majority’s approach is that it completely ignores the public policy against indemnity coverage for intentional torts. This policy is embodied in Insurance Code section 533, which provides that an insurer “is not liable for a loss caused by the wilful act of the insured.” (See J. C. Penney Casualty Ins. Co. v. M.K. (1991)
I propose a different approach. I would begin by asking whether the insured is a nonpolluter, a polluter who neither expected nor intended harm, or a polluter who expected or intended harm. I would treat each of these situations differently.
If it is ultimately determined that the insured did not pollute and thus has no cleanup obligation, there can be no overlap between defense costs and indemnity costs because the insured has no liability that could trigger an insurer’s indemnification duty. In this situation, site investigation costs reasonably incurred for a proper defense purpose are defense costs that the insurer must pay, without limitation as to amount, under its duty to defend. As the majority and I agree (maj. opn., ante, at pp. 76-77, fn. 29), this conclusion follows from the standard CGL policy language.
If it is ultimately determined that the insured is responsible for toxic pollution, and thus also that the insured has a cleanup obligation, there may
If the insured neither expected nor intended the harm caused by the pollution, the insurer under a standard CGL policy has both a duty to defend and a duty to indemnify. The defense obligation is not subject to policy limits; the indemnity obligation is. In this situation, if a particular site investigation activity serves both a proper defense purpose and to discharge the insured’s cleanup liability, the reasonable cost of that activity is both a defense cost and an indemnity cost. Because it is a defense cost, the insurer must pay the site investigation expense without regard to policy limits (in other words, no amount of such payments can exhaust the duty to defend). Because it is also and equally an indemnity cost, however, the insurer may credit the payment against the policy’s limit on indemnity coverage, thereby reducing its obligation to pay other indemnity costs. These consequences necessarily follow from the language of the standard CGL policy.
The majority disputes this conclusion, apparently based on its stubborn insistence that site investigation costs may be characterized as either defense costs or indemnity costs, but not both. (Maj. opn., ante, at pp. 76-77, fn. 29.) The majority cites no provision of the standard CGL policy precluding dual characterization of costs or precluding the insurer from counting such costs dual-purpose costs against the limits of indemnity coverage. For example, the standard CGL policy might provide, but does not, that indemnity expenses count against the policy limits except when they also serve a proper defense purpose. Absent limiting language of this sort, the unambiguous policy must be construed to provide that insurers may count against the policy limits all indemnity expenses regardless of whether they also serve a proper defense purpose.
The remaining situation is the one at issue here, in which the insured expected or intended the harm resulting from the insured’s own acts of toxic pollution. Because the insured has a cleanup obligation, there is a potential for overlap of defense and indemnity costs because site investigation may serve both to determine and to discharge the insured’s cleanup obligation. But in this situation there is no indemnity coverage, both by virtue of the standard CGL policy exclusion for harm that the insurer expected or intended and by operation of Insurance Code section 533’ s prohibition against
If a particular site investigation activity is useful both to reduce and to discharge the insured’s cleanup liability, the reasonable cost of that activity is both a defense cost and indemnity cost. Because it is a defense cost, the insurer is obligated under the standard CGL insurance policy to pay it if it was incurred before the determination was made that the insured expected or intended the harm. But because it is also an indemnity cost, the insurer is prohibited by Insurance Code section 533 from paying it, regardless of when it was incurred. This conflict in the insurer’s obligations—under which it must both pay and not pay the same cost—must be resolved. I would resolve it in favor of enforcing Insurance Code section 533 and relieving the insurer from any contractual obligation it might otherwise have to pay these dual-purpose costs as defense costs. This analysis is based on the standard CGL policy language and on Insurance Code section 533. The resolution of the conflict—a conflict that the majority fails even to acknowledge—is designed to best implement Insurance Code section 533.
Of course, site investigation costs are often incurred before it has been established that the insured expected or intended the harm resulting from the toxic pollution. So long as there is a possibility (because it has not been established that the exclusion for willful harm applies) that the insurer has a duty to indemnify for liability resulting from the pollution, the insurer must pay, as incurred, the reasonable costs of site investigation that serves, or could serve, a proper defense purpose. (See Gray v. Zurich Insurance Co. (1966)
The majority asserts that insofar as this reimbursement serves to relieve the insurer of a contractual obligation to pay costs incurred in the defense of its insured against a “wilful act” claim, it is inconsistent with prior decisions of this court. (Maj. opn., ante, at pp. 76-77, fn. 29.) But none of the decisions the majority cites considered the problem of dual-purpose costs, and none required an insurer to pay indemnity costs for harm caused by a willful act of the insured merely because the same costs might also be characterized as
Although the views I have stated provide a somewhat complicated answer to what may have seemed a simple question, they not only follow logically from the standard CGL policy language and from Insurance Code section 533, but also accommodate the various public and private interests implicated. when an alleged polluter with CGL coverage incurs costs for site investigation.
Ill
On the second issue, the majority concludes that a CGL insurer may obtain reimbursement from the insured for defense costs that may be allocated solely to parts of claims that are not potentially covered under the policy. (Maj. opn., ante, at p. 69.) The majority states that this conclusion is logically compelled by this court’s decision in Buss v. Superior Court, supra,
Because the majority offers nothing new on this point, relying instead on its analysis in Buss v. Superior Court, supra,
As it did in Buss v. Superior Court, supra,
IV
On the third issue, the majority holds that although insurers having overlapping defense obligations may equitably apportion defense costs among themselves, an insured is not required to make a contribution together with the insurers, even when the insured lacked insurance during part of the time that the progressive loss was occurring. (Maj. opn., ante, at p. 72.) I concur in the reasoning of the majority on this issue only.
Conclusion
Here, the jury determined that Aerojet’s site investigation costs were not defense costs that Aerojet’s CGL insurers were required to pay to discharge their duty to defend Aerojet. Because Aerojet has been determined to have expected or intended the harm cause by the TCE pollution, because public policy precludes indemnification for harm that the insured expected or intended, and because site investigation was a necessary step in discharging Aerojet’s cleanup obligation, I would not require Aerojet’s insurers to pay the site investigation costs but would instead uphold the jury determination on this issue. I dissent from the majority opinion to the extent it reaches a contrary conclusion.
Because an insurer’s contractual defense obligation under the standard language of a CGL policy runs to the whole of any action seeking potentially covered damages, not to individual claims or parts of claims, I dissent from the majority’s holding that Aerojet must reimburse its insurers for any defense costs that may be allocated solely to parts of claims not potentially covered.
I concur in the majority’s holding that in the equitable apportionment of defense costs among insurers having overlapping defense obligations, no share of these costs may be allocated to Aerojet on the theory that it was its own insurer under the INA fronting policies.
I would reverse the judgment of the Court of Appeal and remand the matter to that court with directions to affirm the judgment of the superior court.
Concurrence in Part
I concur in the majority’s analysis in parts I. and II.B. I dissent, in part, to the majority’s discussion of general
The majority, however, chooses to ignore both fundamental contract interpretation rules and our own Montrose opinion to conclude that Aerojet’s contract with INA was irrelevant, and that Aerojet never assumed the risk that a loss might occur during the period it was insured by INA’s limited cash flow policies. But “When periods of no insurance reflect a decision by an actor to assume or retain a risk, as opposed to periods when coverage for a risk is not available, to expect the risk-bearer to share in the allocation is reasonable.” (Owens-Illinois, Inc. v. United Ins. Co. (1994)
The majority’s faulty reasoning begins with its discussion in part II.A. about the scope of commercial general liability (CGL) insurance coverage. In discussing an insurer’s duty to indemnify its insured, the opinion relies on Montrose, supra, 10 Cal.4th at pages 669-673, to assert that the duty “extends to all specified harm that may possibly have been caused by an included occurrence, even if some such harm may possibly have resulted beyond the policy period.” (Maj. opn., ante, at p. 58.) In other words, the majority explains, “if specified harm may possibly have been caused by an included occurrence and may possibly have resulted, at least in part, within the policy period, it perdures to all points of time at which some such harm may possibly have resulted thereafter.” (Ibid., fn. omitted.) The majority’s
As the Court of Appeal observed, Montrose specifically rejected a joint and several liability approach to allocating losses among insurers. As Montrose itself pointed out, “Allocation of the cost of indemnification once several insurers have been found liable to indemnify the insured for all or some portion of a continuing injury or progressively deteriorating property damage requires application of principles of contract law to the express terms and limitations of the various policies of insurance on the risk.” (Montrose, supra,
More importantly, however, I cannot agree with the majority’s application of its faulty introductory reasoning to part II.C., in which it disagrees with the Court of Appeal’s apportionment analysis and judgment. Here, the majority again ignores fundamental contractual principles. Even though Aerojet contracted to operate, in essence, as a self-insured under INA’s cash flow insurance policy for eight of the thirty years of the loss period, the majority concludes Aerojet owes no duty to pay its pro rata share of the defense costs during that period because the INA policy did not create “any right or duty in either Aerojet or INA as against the world, including the other insurers.” (Maj. opn., ante, at p. 70.) The majority believes that an insurer may not seek a pro rata contribution from its insured even if the insured deliberately assumed its own defense costs during a portion of the loss period. Under the language of the applicable insurance policies here, I cannot agree.
The Court of Appeal recognized the importance of applying contract principles to the allocation question presented. The court stated: “In de
By rejecting the Court of Appeal’s judgment allocating a portion of the defense costs to Aerojet on a pro rata basis for the eight years the insured decided to forgo coverage for defense costs, however, the majority chooses to ignore the language of the specific insurance policies that Aerojet purchased and our own Montrose opinion. Instead, the majority concludes that Aerojet’s contracts with INA and its other insurers were irrelevant, that the language in the “other insurance” clauses was without effect, and that Aerojet never assumed the risk that a loss might occur during the period it was insured by INA’s limited cash flow policies. For this reason, the majority refuses to affirm the judgment allocating defense costs to Aerojet on a pro rata basis during the time INA insured it. By making a risk decision when it originally purchased the INA insurance policies to forgo coverage for defense costs it might incur over an eight-year period, Aerojet had no objectively reasonable expectation of coverage for defense costs for occurrences happening during that period. Just as the insurers were free to contract as they pleased, so was Aerojet.
As the trial court and the Court of Appeal held, Aerojet should contribute its pro rata share of defense costs for the period it contracted to pay its own defense costs in exchange for lower premiums and limited cash flow coverage by INA. Instead, the majority hands Aerojet a windfall by forcing successive insurers, including the named defendant here, to prove on remand what we already know: that Aerojet is responsible for defense costs attributable to the extent of its risk management decision. (Maj. opn., ante, at pp. 73-74.)
Baxter, J., concurred.
Appellants’ petition for a rehearing was denied March 11, 1998, and the opinion was modified to read as printed above. Kennard, J., was of the opinion that the petition should be granted.