AIU Ins. Co. v. Superior Ct.,
51 Cal. 3d 807, 274 Cal. Rptr. 820, 799 P.2d 1253 (1990)
Real party in interest FMC Corp. sued more than 60 of its primary and excess general liability insurers to determine whether they were obligated to provide coverage for cleanup and other response costs incurred pursuant to the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). The trial court held that FMC was entitled to be reimbursed whether the environmental cleanup costs were incurred directly by FMC pursuant to injunction or reimbursed to the government agencies. It was immaterial whether the costs were incurred out of the exercise of equitable rather than legal authority.
The California Court of Appeal reversed the trial court and entered judgment in favor of the insurers.
On appeal, the California Supreme Court noted that the court of appeal decision was out of sync with nearly every other state appellate decision that addressed the issue of whether cleanup costs incurred under environmental statues were covered by commercial general liability (CGL) policies. The court analyzed the policy language “legally obligated” and concluded that the term encompasses the types of relief sought in the third-party suits.
With regard to the interpretation of the word “damages,” the court began with its ordinary and popular definition found in dictionaries and applied it for insurance purposes. It noted that some courts focused on narrower technical meanings, such as the distinction between law and equity. It also reviewed those courts that distinguished between restitution and damages. The court concluded, however, that the label of restitution is not dispositive. The costs of injunctive relief—whether incurred for prophylactic, mitigative, or remedial purposes—do not readily satisfy the statutory or dictionary definition of damages.
The court found it unlikely that parties to CGL policies intended to cover reimbursement of response costs but not the costs of injunctive relief, where the latter costs are incurred for exactly the same purposes. “It would exalt form over substance to interpret CGL policies to cover one remedy but not the other.”
The court also addressed the term of the policy “because of property damage.” It noted that some claims do not allege cleanup because of property damage. However, it found that contamination of the environment satisfies this requirement:
... the mere fact that governments may seek reimbursement of response costs or injunctive relief without themselves having suffered any tangible harm to a proprietary interest does not exclude the recovery of cleanup costs....
The court found it immaterial whether the motivation is protection of property, protection of the health of persons living near the site, regulatory or proprietary. The event precipitating legal action is contamination of property.
The Supreme Court of California reversed the California Court of Appeal, holding that the policies cover the costs of reimbursing government agencies and complying with injunctions ordering cleanup under CERCLA.
by Jill B. Berkely
The issue of “what are damages” is illustrated in those cases in which the court must determine whether the payment of response costs in a Comprehensive Environmental Response Compensation and Liability Act (CERCLA) environmental cleanup action meets the policy’s definition of “damages” because of property damage. The question was answered by the California court in its 1990 supreme court decision, AIU Ins. Co. v. Superior Ct., 51 Cal. 3d 807, 274 Cal. Rptr. 820, 799 P.2d 1253 (1990), which followed the 1989 decision, Aerojet General Corp. v. Superior Ct., 211 Cal. App. 3d 219, 257 Cal. Rptr. 621 (1989). Although this decision hardly settled the matter in other jurisdictions, it has come to be known as the definitive answer, making clear the distinction between restitution (i.e., the return of something wrongfully received), and response costs, whether incurred directly by the polluter or paid to reimburse the government.
Insurers argue that remediation costs pursuant to government actions seek injunctive or other equitable relief and therefore are not “money damages.” Policyholders counter that the term “damages,” under its common, ordinary meaning, covers such costs because they are required to expend money for third-party damage.
Presently, only the Supreme Court of Maine holds that CERCLA response costs are not considered “damages” under commercial general liability (CGL) policies. Patrons Oxford Mut. Ins. Co. v. Marois, 573 A.2d 16 (Me. 1990). When Maine reached its conclusion that the phrase “as damages” in CGL policies did not include CERCLA response costs, it relied in part on that state’s prior legal conclusion that such language would not cover the costs of punitive damages.