Coverage Found for Pollutant Discharge at Stringfellow Acid Pits
February 2007
In State of California
v. Underwriters at Lloyd's of London (Cal. App., 4th Dist., Jan. 12,
2007), the court held that four insurers were not estopped from invoking a pollution
exclusion to deny coverage; a 1969 discharge of pollutants was sudden and accidental
within the meaning of the pollution exclusion; a water course exclusion did
not apply to the claims; and the state was not required to allocate damages
to obtain indemnity for its covered liability.
by Kevin
Merriman
Goldberg
Segalla LLP
The Stringfellow Site, which was opened as a hazardous waste site in 1956,
was operated for 16 years, during which more than 30 million gallons of liquid
industrial wastes were deposited directly into unlined evaporation ponds. The
site was closed in 1972 when the state found contamination in the groundwater.
The state admitted it negligently selected, designed, and supervised construction
of the site by failing to ensure adequate diversion channels and other safeguards
to protect against heavy rains.
In March 1969, a heavy rainstorm caused polluted rainwater to overflow and
contaminate the environment. In January 1973, there were signs of leaking, which
grew worse by 1975. Recommendations to use a hydraulic barrier to capture waste
and protect the groundwater, and to cap the site to prevent overflow from rain,
were not implemented.
Heavy rains in 1978 caused the ponds to fill and overflow. When the ponds
began to overflow, the state made two controlled discharges from the ponds,
which went directly into Pyrite Creek, and ultimately into the Santa Ana River.
The controlled discharges, which would not have been necessary had the state
installed the hydraulic barrier and cap, resulted in the release of over 1 million
gallons of contaminants into the environment. The state was later found liable
for all past and future remediation costs in connection with cleanup at the
site.
At issue in this appeal were four policies that were purchased after the
site was closed, but before the 1978 discharges, which provided coverage from
September 1976 to May 1978. The policies each contained a pollution exclusion,
with an exception for "sudden and accidental" discharges. Three of the policies
also had a water course exclusion, which excluded property damage arising from
the discharge of pollutants into or upon any water course or body of water.
While the fourth policy did not have a water course exclusion, its pollution
exclusion applied to discharges into or upon "any watercourse or body of water."
Estoppel
Among the issues on appeal was the meaning of "sudden," as used in the exception
to the pollution exclusion. The state conceded that if "sudden" meant "abrupt,"
it was entitled to coverage only for the 1969 and 1978 discharges, and not for
gradual releases over a period of years. Initially, the state argued that the
doctrine of regulatory estoppel barred the insurers from even relying on the
pollution exclusion because the insurance industry had represented to state
regulators that the exclusion would not be interpreted to apply only to abrupt
discharges of pollutants. The court would not address the issue, however, since
the state failed to timely raise the defense, and did not present any evidence
that the insurance industry made any representations to California regulators
concerning the effect of the exception.
Nor would the court address the state's claims that judicial estoppel prevented
one of the insurer's from asserting that the exception applied only to abrupt
discharges of pollutants. Though the state argued that the insurer had taken
a contrary position in a Massachusetts case, the state failed to present evidence
of what the insurer actually argued in that case or to timely raise the defense.
Pollution Exclusion
The state also maintained that the pollution exclusion did not apply because
the discharges fell within the exclusion's exception for "sudden and accidental"
discharges. The state argued that "sudden and accidental" meant only that the
discharge of pollutants must be unexpected and unintended, not abrupt in a temporal
sense. The court disagreed. Acknowledging that the state's high court had not
yet addressed the issue, the court relied on a number of appellate court decisions
that unanimously held the "sudden and accidental" exception only covers abrupt,
not gradual, pollution.
Next, the state argued that even if "sudden and accidental" meant that the
discharge must be abrupt, the 1969 and 1978 discharges met the requirement.
The court agreed that the 1969 discharge was sudden and accidental, but concluded
that the remaining discharges were not. First, the court found that the relevant
discharge for purposes of determining whether the "sudden and accidental" exception
applied was not the initial dumping of wastes at the site, but the releases
that occurred after they were deposited at the site. The court observed that:
- an intervening event may occur between the initial disposal of waste
on the landfill and the actual damage that eventually resulted, and that
the intervening event may have been sudden and accidental.
With respect to the 1969 discharge, the court concluded it was a sudden and
accidental release. The court found the release occurred because the ponds topped
out after the rains, apparently within a single day, and there was no dispute
that the discharge flowed through a washed out section of a dike, which could
reasonably be viewed as a "sudden" event.
The court reached a different conclusion with respect to the 1978 discharges.
The court found these discharges did not fall within the exception because they
were not unexpected and therefore not "accidental." The court found that years
before the 1978 discharges, the state knew:
- There was a risk of the site becoming inundated by rain and overflowing,
as actually happened in 1978.
- The site had already overflowed and released pollutants before.
- It needed to place a cap on the site to prevent this from happening
again.
Thus, the court found the releases were not unexpected, even if they were
not intended.
Watercourse Exclusion
The state also maintained that the water course exclusion did not apply because
the 1969 and 1978 discharges were not confined to Pyrite Creek, an argument
to which the court agreed. The court concluded that the discharge of pollutants
into the groundwater does not fall within the exclusion because "body of water"
should be interpreted to mean "an aggregate of water having defined boundaries,"
and that the exclusion should not apply to the discharges that damage soil,
even if it initially entered a water course.
Allocation
Finally, the state maintained it could not differentiate between the work
and expenses it performed and incurred to remedy property damage caused by the
various covered and uncovered causes of release. Thus, the state argued it was
not obligated to do so to obtain coverage under the policies. The court agreed,
concluding the state was not required to allocate its liability based on the
cause of the underlying damage, so long as a covered cause was a concurrent
contributing cause. The court reasoned that:
- the state's liability for the 1969 discharge, in itself, sufficed to
render the state liable for all of the damages under tort law principles.
All of the damages therefore fell within the insuring clause obligating
insurer to pay "all sums which the insured shall become obligated to pat
by reason of liability imposed by law."
The court held that:
- because the state would be jointly and severally liable for all of the
resulting damage and not just those amounts traceable to its own negligence,
the insurers were liable to indemnify the state against all of its liability.
The court did not foreclose the possibility, however, that an insurer could
limit coverage to covered causes, provided it could demonstrate that the total
damage was divisible.
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