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The California Supreme Court ruled Thursday that the damages clause in a standard insurance policy does not require the insurance company to pay for pollution cleanup orders directed at policyholders. In a 5-2 decision, the majority ruled that the provision imposing the duty to defend is limited to money ordered by a court, and doesn’t apply to environmental protection agencies. The justices conceded that court-imposed damages and administrative orders may be measured in the same terms of dollars and cents. And though they acknowledged that the latter can sometimes obviate court action, they ultimately ruled that orders are different from court judgments. Justice Stanley Mosk, writing for the majority, said the court isn’t in the business of rewriting the policy provision “in order to remove its limitation to money ordered by a court.” To do so, he said, “might compel insurers to give more than they promised and might allow insureds to get more than they paid for.” Chief Justice Ronald George and Justices Marvin Baxter, Ming Chin and Janice Rogers Brown concurred in Certain Underwriters at Lloyd’s, London v. Superior Court (Powerine Oil), S084057. David Goodwin, a partner with Heller Ehrman White & McAuliffe who represented Powerine Oil Co., said Thursday’s decision will likely have a modest affect on most policyholders. He noted that insurance policies signed after 1985 include pollution exclusions, and the number of pre-1985 environmental claims are reaching the end of the bell curve. “Still, in the future, we are probably going to see a lot more environmental cost recovery litigation,” he noted. “And what if you have a responsible [party] with no assets other than insurance? The likely outcome is the pollution won’t get cleaned up.” But Patrick Cathcart, a partner at Hancock Rothert & Bunshoft’s Los Angeles office who represented the insurer, said he hopes Thursday’s decision will encourage policyholders to consult their insurers as soon as they are notified that they are potentially responsible parties. In the past, he said, some policyholders may have wrangled with an agency and then turned to their insurers to fund whatever agreement had been reached. Goodwin agreed that companies hit with cleanup orders may now end up working more closely with their insurance companies. But he added that he knows of no cases of an insurance company volunteering to fund a cleanup to avoid litigation. He also pointed out that the decision makes California the only state in which the highest court has held that cleanup costs ordered by a court are damages but the same costs imposed by an agency are not. “They were out on a limb on this one,” he said. Even Mosk conceded this — but remained steadfast. “We are not unaware, however, that yet other courts are contra. Neither are we unaware that such other courts are more numerous,” he wrote. “Their number, however, adds nothing to their weight.” Powerine Oil Co. took certain underwriters at Lloyd’s of London to court after they refused to cover the company’s costs in complying with orders from regional water quality control boards to clean up 10 contaminated sites in Los Angeles and San Diego counties. The 2nd District Court of Appeal ruled that the insurer agreed to defend only a “suit” and thus didn’t have to pay the cost of obeying the administrative cleanup order. Mosk’s majority opinion in Powerine is built on a 1998 ruling in which the court held that an insurer’s duty to defend toxic pollution cases is limited to “suits,” which it defined as actions brought in court. But Mosk was one of three justices who dissented in that case, Foster-Gardner v. National Union Fire Insurance Co., 18 Cal.4th 857. But the two other justices to dissent in Foster-Gardner stuck to their guns and dissented again. “One may accept the majority decision in Foster-Gardner as binding precedent and yet conclude that a [comprehensive general liability] insurance carrier has a duty to indemnify its insured for the costs of complying with an administrative cleanup order,” Justice Joyce Kennard wrote, with Justice Kathryn Mickle Werdegar concurring. Kennard pointed to the 1966 insurance case of Gray v. Zurich Insurance Co., 65 Cal.2d 263, in which the court held that an insurer could have a duty to defend even when there was no duty to indemnify. Kennard notes that “in the course of explaining this holding we said that the duty to defend is independent of the indemnification coverage.” And Kennard warned that a policyholders’ only financially viable option may now be to ignore agency cleanup orders and await formal suit. “The big losers in today’s decision,” she concluded, “are public health and the environment.”
Addressing Environmental Concerns in Real Estate Transactions. January 23-February 5.

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