Insurance Law News - July 2009

• Toxic Tort Claims Against Insured Barred by “Seepage / Pollution / Contamination” Exclusion, and Insured Fails to Satisfy Conditions of “Buy Back” Coverage
• Insurer Has No Duty to Cover Costs Awarded In Connection with Claims that Are Not Potentially Covered
• Restitution Order in Criminal Case Does Not Prevent Victim (or Insurer) From Obtaining Separate Civil Judgment

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Toxic Tort Claims Against Insured Barred by "Seepage / Pollution / Contamination" Exclusion, and Insured Fails to Satisfy Conditions of "Buy Back" Coverage

The California Court of Appeal has held that toxic tort claims against an insured fell within the scope of a general liability policy’s “seepage / pollution / contamination” exclusion, and that the insured failed to satisfy the conditions necessary to trigger coverage under the policy’s “buy back” pollution coverage. (Venoco Oil Co. v. Gulf Underwriters Ins. Co. (2009) 2009 WL 1875640)  

Facts

For many years, various oil companies operated an oil and gas production facility near Beverly Hills High School. In 1995, Venoco Oil, Inc. (Venoco) assumed responsibility for operating the facility.

In 1996, Venoco obtained a general liability insurance policy from Gulf Underwriters Insurance Company for the period of April 1, 1996 through April 1, 1997. The Gulf policy contained an exclusion that barred coverage for any claims “directly or indirectly ... arising out of seepage ... pollution and/or contamination....” However, Venoco paid an additional premium in order to “buy back” limited pollution coverage. The “buy back” clause provided the insured with coverage for pollution claims, but only if: (1) the claim stemmed from an accident; (2) the accident began on an identifiable date during the policy period; (3) the insured discovered the accident within seven days after it began; and (4) the insured notified the insurer within 60 days of discovery of the accident.

In 2003 (six years after expiration of the Gulf policy), numerous former students and employees of the High School filed lawsuits against Venoco for personal injuries allegedly caused by long-term exposure to toxic pollution from Venoco's oil and gas operations. Venoco tendered the lawsuits to Gulf for defense. Gulf denied coverage, asserting that the underlying plaintiffs’ claims against Venoco were barred by the policy’s “seepage / pollution /contamination” exclusion, and that Venoco had not satisfied the conditions necessary to trigger the “buy back” pollution coverage.  

Following Gulf’s denial of coverage, Venoco sued Gulf for breach of contract and bad faith. The trial court entered summary judgment in favor of Gulf, and Venoco appealed. 

Holding

The Court of Appeal affirmed. According to the appellate court, the underlying plaintiffs’ claims against Venoco all fell within the scope of the Gulf policy’s “seepage / pollution / contamination” exclusion. The court described the exclusion as “broad and absolute,” excluding coverage for “all claims directly or indirectly arising out of seepage and/or pollution and/or contamination.” 

Further, Venoco had not established the conditions necessary to trigger the “buy back” pollution coverage. Specifically, there was no evidence that the underlying plaintiffs’ injuries resulted from an accident occurring on an identifiable date during the Gulf policy period; that Venoco had discovered any such accident within seven days after it began; or that Venoco had notified Gulf of any such accident within 60 days of the accident. The conditions of the “buy back” pollution coverage were ”conspicuous, plain and clear,” and Venoco’s failure to satisfy those conditions precluded Venoco from recovering under that portion of the policy. There was no potential for coverage and, hence, no duty to defend.

Comment

The appellate court spent considerable time discussing the policy condition requiring that the insured notify the insurer of an accident within 60 days of the accident. The insured argued that the insured’s failure to comply with the 60-day notice requirement should defeat coverage only if the insurer proved that the late notice caused “actual prejudice” to the insurer. The appellate court disagreed, holding that the 60-day late notice provision was a “condition precedent” to coverage under the policy. Thus, the 60-notice condition was enforceable even without a showing of prejudice.

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Insurer Has No Duty to Cover Costs Awarded In Connection with Claims that Are Not Potentially Covered

The California Court of Appeal has held that an insurer has no obligation under its policy’s supplementary payments provision to cover costs awarded in connection with a claim that was not potentially covered, even if the insurer defended the action and even if other claims in that action were potentially covered. (State Farm Gen. Ins. Co. v. Mintarsih (2009) 175 Cal.App.4th 274.)

Facts

This insurance coverage action arose out of an underlying civil lawsuit for false imprisonment. The claimant, Mimin Mintarsih, alleged that Dennis and Dina Lam falsely imprisoned her in their home, forcing her to work as a domestic servant for seven years and preventing her from seeking needed medical and dental care. Among other things, Mintarsih sued the Lams for false imprisonment, negligence, and wage and hour violations. Following a jury trial, the trial court entered judgment in favor of Mintarsih. The award included $87,000 in compensatory damages for false imprisonment and negligence and $162,000 in attorneys’ fees for the wage and hour claims, as permitted under the Labor Code.

State Farm, which insured the Lams, filed a declaratory relief action against Mintarsih (the Lams’ assignee) as to its coverage obligations. Issues before the appellate court included (1) whether State Farm had a duty to cover the attorneys’ fee award under the policies’ supplemental payments provisions; (2) whether Insurance Code section 533 barred indemnity coverage for the negligence claim; and (3) whether State Farm owed post-judgment interest on the entire action. As set forth below, the Court of Appeal found in favor of State Farm on all three issues.

Holding

First, the Court held that State Farm has no obligation to cover costs (including attorneys’ fees) arising from the wage and hour claims, because those claims were not potentially covered under the policy. This was true even though the underlying action was a “mixed” action involving both covered and uncovered claims. The policies both provided that State Farm would pay expenses incurred and costs taxed against the insured “in suits we defend.” The Court observed that this obligation to cover costs only arises when there is a duty to defend, and that this obligation is contractual in nature – that is, it arises out of the policy’s defense provision. The Court then observed that an insurer’s duty to defend a “mixed” action, by contrast, is not contractual but rather is implied in law. 

The Court went on to note that under Buss v. Superior Court, an insurer is entitled to reimbursement of defense costs allocated solely to claims that were not potentially covered, since an insured cannot reasonably expect to retain the benefit of those payments. Likewise, reasoned the Court, an insured cannot reasonably expect its insurer to pay costs that can be allocated solely to claims that were not even potentially covered. Thus, even in mixed actions, an insurer is not obligated to cover costs arising from claims were not potentially covered under the policy.

Second, the Court held that Insurance Code section 533 precludes indemnity coverage for the negligence claims. The Court observed that section 533 bars coverage for willful or intentional conduct, as well as negligent conduct that is so closely related to intentional misconduct as to be inseparable from it. Since the Lams’ negligent failure to provide timely medical and dental care to Mintarsih was closely interrelated to the false imprisonment, section 533 barred coverage for the negligence claim.

Finally, the Court held that State Farm does not have an obligation to pay post-judgment interest on the entire action. The policy provision in question provided that State Farm would pay “interest on the entire judgment which accrues after entry of the judgment and before we pay . . . that part of the judgment which does not exceed the limit of liability.” The Court reasoned that this provision contemplates a covered claim and is necessarily tied to an insurer’s indemnity obligation, as reflected by the provision’s reference to the policy limits. Thus, held the Court, where there is no coverage for the damages awarded, there is no coverage for post-judgment interest.

Comment

In reaching its decision regarding costs in “mixed” actions, the Second Appellate District diverged with the Fourth Appellate District’s decision in Prichard v. Liberty Mutual Insurance Co. (2000) 84 Cal.App.4th 890. Footnote 22 of the Pricharddecision supported an insurer’s liability for costs arising solely from claims that were not even potentially covered. (Id. at 912 n.22.) Noting that Pricharddid not properly distinguish the insurer’s contractual duty to defend from its duty implied in law, the State Farm Court expressly declined to follow Prichard. This arguably creates a circuit split, making the issue ripe for review by the California Supreme Court.

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Restitution Order in Criminal Case Does Not Prevent Victim (or Insurer) From Obtaining Separate Civil Judgment

The California Court of Appeal has held that a restitution order in a criminal case does not prevent the victim (or the victim’s insurer) from obtaining a separate civil judgment based on the same facts, but any payments made against the restitution order will reduce the amount owed on the civil judgment. (Vigilant Insurance Company v. Chiu (2009) 96 Cal.Rptr.3d 54)

Facts

Over a period of time, Robert Chiu stole $397,085.31 worth of merchandise from his employer, ViewSonic. Ultimately, he was convicted of the crime of grand theft. As a part of his sentence, Chiu was ordered to pay ViewSonic restitution in the amount of $615,000.00 pursuant to Penal Code section 1202.4. This included the value of the stolen property, as well as lost profits and opportunity costs, and pre‑order interest.

Vigilant Insurance Company issued a policy of crime insurance that covered ViewSonic’s losses. After applying the policy’s $50,000.00 deductible, Vigilant paid $347,085.31 to ViewSonic. In turn, ViewSonic provided Vigilant with a written assignment of all rights against Chiu.

Vigilant filed suit against Chiu for fraud, conversion and embezzlement. It sought recovery of the $347,085.31 paid to ViewSonic, plus the deductible of $50,000.00.  After a bench trial, the court awarded judgment in favor of Vigilant totaling $504,306.89 which consisted of $397,085.31 in actual damages, interest of $105,853.15 and costs in the amount of $1,368.43.

On appeal, Chiu argued that, by virtue of the restitution order and assignment, ViewSonic, already had what amounted to a judgment against Chiu in the sum of $615,000.00, and that the civil judgment would make Chiu liable for the same loss twice.

Holding

The Court of Appeal held that a restitution order is not a civil judgment. The Court also held that a restitution order does not preclude the victim (or the victim’s insurer) from pursuing a separate civil action based on the same facts from which the criminal conviction arose. However, the Court also noted that Penal Code section 1202.4 (j) provides that “[r]estitution collected pursuant to this subdivision shall be credited to any other judgments for the same losses obtained against the defendant arising out of the crime for which the defendant was convicted.” 

The Court held that the statutory provisions, read together, demonstrate legislative recognition of the distinct and separate right of a victim to pursue a civil remedy irrespective of the restitution order, subject only to the requirement that the any amounts paid under the restitution order be credited against the civil judgment.

Comment     

It is well established under California law that a victim’s insurance company can bring civil actions for reimbursement against the wrongdoer (or against the victim to the extent the wrongdoer already has made restitution). In fact, insurer reimbursement claims are encouraged, since equitable principles would place the loss on the wrongdoing defendant, preclude a windfall recovery by the victim, and reimburse the insurer that honored a claim against a policy.

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