Policy's Wording Is Key to Determining Insured's Coverage in Matters that Do Not Constitute Formal Lawsuits

The recent California Supreme Court decisions in Powerine Oil Co. v. Superior Court, Case No. 113295 (Aug. 29, 2005) ('Powerine II') and County of San Diego v. Ace Property & Casualty Ins. Co., Case No. S114778 (Aug. 29, 2005), illustrate the significance the court ascribes to specific wording of insurance policies and the coverage they afford for liability imposed on an insured other than through a formal court judgment. In particular, Powerine II establishes umbrella and excess carriers' possible duty to indemnify insureds for administrative actions or other matters that do not constitute formal lawsuits.

In Powerine II, the Supreme Court affirmed the appellate court's decision that the insuring agreements of multiple umbrella policies issued by various carriers to Powerine afforded the possibility of coverage to Powerine for the environmental liability imposed through administrative, rather than court orders. The Powerine II court distinguished its earlier decisions in Certain Underwriters at Lloyd's London v. Superior Court (Powerine Oil Co.), 24 Cal. 4th 945 (2001), and Foster-Gardner Inc. v. National Union Fire Ins. Co., 18 Cal. 4th 857 (1998), which addressed different and narrower language, finding that primary liability policies (CGL policies) give rise to a duty to defend and indemnify only formal lawsuits brought in court.

In Powerine II, the court noted that both Powerine I and Foster-Gardner were based on literal interpretations of CGL policies' agreement to 'defend any suit against the insured seeking damages.' Foster-Gardner pointed to the distinction in CGL policies between 'suits' which triggered a defense duty and the discretionary right of insurers to investigate suits and 'claims.' In Powerine I, the court ruled in part on the following syllogism based on Foster-Gardner: Because the duty to defend is broader than the duty to indemnify, with the duty to defend limited to defense of a formal lawsuit in which damages are sought, then 'the duty to indemnify is not broad enough to extend beyond 'damages,' ie, money ordered by a court, but rather limited thereto.'

The same literal approach led the California Supreme Court to a different outcome in Powerine II. The court found the policy language at issue unambiguous. The court pointed to the manner in which the umbrella policies used the additional terms 'expenses,' 'compromise,' 'settlement,' 'investigation,' and 'claims' as affording broader coverage than that which is available under CGL policies as interpreted in Foster-Gardner and Powerine. The Supreme Court concluded that 'the express wording of the central insuring agreement in these nine excess/ umbrella policies goes well beyond mere coverage for court-ordered money 'damages,' and is broad enough to include coverage for the liability of environmental cleanup and response costs ordered by an administrative agency.' Conversely, the court's earlier decisions were premised upon the 'single word 'damages' that limits the indemnification obligation to money ordered by a court.'

The court further found that greater coverage under the umbrella policies was consistent with policyholders' reasonable expectations. Umbrella policies are not intended to be mere excess policies over CGL policies, but are intended to provide broader coverage. Umbrella policies are written to provide two forms of coverage: 1) excess coverage, and 2) primary coverage for aspects of coverage not provided by the underlying CGL policy. This additional, broader coverage indicated to the court that policyholders' reasonably expected broader coverage, beyond the limited coverage provided by the CGL policies in Powerine I and Foster-Gardner. The court's conclusion holds umbrella insurers to their promise that umbrella policies will 'fill any gaps in coverage left open by the [underlying] coverage.' Walter Crosky, et al., 'California Practice Guide: Insurance Litigation' Section 8:84 (The Rutter Group 2003).

The court's holding that an umbrella policy's use of words affording coverage to more than 'suits' must be given separate meaning indicates that umbrella policies defense of suits and claims extends the duty to defend under such policies to many pre- and non-litigation contexts. Such a defense requirement is not unusual in umbrella policies. Eugene Anderson, et al., 'Insurance Coverage Litigation,' Sections 13.04[A] and 13.09[A] (2d ed. Aspen Law & Business 2002).

Umbrella policies, however, do not utilize standard wording to the extent that CGL policies do. As a result, each umbrella policy must be checked for language that distinguishes it from the prior rulings in Powerine I and Foster-Gardener. Language that provides indemnification and defense beyond 'suits' seeking 'damages,' creates the basis for distinguishing a policy from the limitations imposed in the earlier decisions and affords the basis for greater coverage consistent with the holding in Powerine II.

The court emphasized this point in the second decision, County of San Diego v. Ace Property & Casualty Ins. Co. Interpreting a manuscript, non-standard excess policy, the court found that the policy's language provided coverage only for money damages, not the environmental liability imposed upon the county through administrative orders. The Ace policy provided coverage ”for all sums which the insured is obligated to pay by reason of liability imposed by law or assumed under contract or agreement,' arising from 'damages' caused by personal injuries or destruction, or loss of use of tangible property.' The court applied its decision in Powerine I, concluding that the use of the term 'damages' in the policy's central insuring provision was a 'term of limitation of the indemnity obligation under the insuring agreement.'

While the court in Powerine II also looked to the limits of liability provision and its definition of 'ultimate net loss' to support its holding that more than damages were covered under the umbrella policies at issue, the court in County of San Diego found that the limits of liability in the Ace non-standard policy at issue did not expand the scope of potential coverage. The court noted that the limits of liability provision, unlike in Powerine II, had not been incorporated by reference into the central insuring provision. The court further held that the limits of liability provision's main function was 'setting forth of limits of excess liability coverage over the underlying liability limits. (Emphasis in original.)

Read together, the two decisions emphasize the importance of the specific language used in insurance policies rather than broad characterizations of policy types. The decision in Powerine II affords umbrella policy insureds greater assurance that the broader primary coverage promised by umbrella carriers will be honored.

Clyde Hettrick is a partner at Dickstein Shapiro & Oshinsky LLP.

The recent California Supreme Court decisions in Powerine Oil Co. v. Superior Court, Case No. 113295 (Aug. 29, 2005) ('Powerine II') and County of San Diego v. Ace Property & Casualty Ins. Co., Case No. S114778 (Aug. 29, 2005), illustrate the significance the court ascribes to specific wording of insurance policies and the coverage they afford for liability imposed on an insured other than through a formal court judgment. In particular, Powerine II establishes umbrella and excess carriers' possible duty to indemnify insureds for administrative actions or other matters that do not constitute formal lawsuits.

In Powerine II, the Supreme Court affirmed the appellate court's decision that the insuring agreements of multiple umbrella policies issued by various carriers to Powerine afforded the possibility of coverage to Powerine for the environmental liability imposed through administrative, rather than court orders. The Powerine II court distinguished its earlier decisions in Certain Underwriters at Lloyd's London v. Superior Court (Powerine Oil Co.), 24 Cal. 4th 945 (2001), and Foster-Gardner Inc. v. National Union Fire Ins. Co., 18 Cal. 4th 857 (1998), which addressed different and narrower language, finding that primary liability policies (CGL policies) give rise to a duty to defend and indemnify only formal lawsuits brought in court.

In Powerine II, the court noted that both Powerine I and Foster-Gardner were based on literal interpretations of CGL policies' agreement to 'defend any suit against the insured seeking damages.' Foster-Gardner pointed to the distinction in CGL policies between 'suits' which triggered a defense duty and the discretionary right of insurers to investigate suits and 'claims.' In Powerine I, the court ruled in part on the following syllogism based on Foster-Gardner: Because the duty to defend is broader than the duty to indemnify, with the duty to defend limited to defense of a formal lawsuit in which damages are sought, then 'the duty to indemnify is not broad enough to extend beyond 'damages,' ie, money ordered by a court, but rather limited thereto.'

The same literal approach led the California Supreme Court to a different outcome in Powerine II. The court found the policy language at issue unambiguous. The court pointed to the manner in which the umbrella policies used the additional terms 'expenses,' 'compromise,' 'settlement,' 'investigation,' and 'claims' as affording broader coverage than that which is available under CGL policies as interpreted in Foster-Gardner and Powerine. The Supreme Court concluded that 'the express wording of the central insuring agreement in these nine excess/ umbrella policies goes well beyond mere coverage for court-ordered money 'damages,' and is broad enough to include coverage for the liability of environmental cleanup and response costs ordered by an administrative agency.' Conversely, the court's earlier decisions were premised upon the 'single word 'damages' that limits the indemnification obligation to money ordered by a court.'

The court further found that greater coverage under the umbrella policies was consistent with policyholders' reasonable expectations. Umbrella policies are not intended to be mere excess policies over CGL policies, but are intended to provide broader coverage. Umbrella policies are written to provide two forms of coverage: 1) excess coverage, and 2) primary coverage for aspects of coverage not provided by the underlying CGL policy. This additional, broader coverage indicated to the court that policyholders' reasonably expected broader coverage, beyond the limited coverage provided by the CGL policies in Powerine I and Foster-Gardner. The court's conclusion holds umbrella insurers to their promise that umbrella policies will 'fill any gaps in coverage left open by the [underlying] coverage.' Walter Crosky, et al., 'California Practice Guide: Insurance Litigation' Section 8:84 (The Rutter Group 2003).

The court's holding that an umbrella policy's use of words affording coverage to more than 'suits' must be given separate meaning indicates that umbrella policies defense of suits and claims extends the duty to defend under such policies to many pre- and non-litigation contexts. Such a defense requirement is not unusual in umbrella policies. Eugene Anderson, et al., 'Insurance Coverage Litigation,' Sections 13.04[A] and 13.09[A] (2d ed. Aspen Law & Business 2002).

Umbrella policies, however, do not utilize standard wording to the extent that CGL policies do. As a result, each umbrella policy must be checked for language that distinguishes it from the prior rulings in Powerine I and Foster-Gardener. Language that provides indemnification and defense beyond 'suits' seeking 'damages,' creates the basis for distinguishing a policy from the limitations imposed in the earlier decisions and affords the basis for greater coverage consistent with the holding in Powerine II.

The court emphasized this point in the second decision, County of San Diego v. Ace Property & Casualty Ins. Co. Interpreting a manuscript, non-standard excess policy, the court found that the policy's language provided coverage only for money damages, not the environmental liability imposed upon the county through administrative orders. The Ace policy provided coverage ”for all sums which the insured is obligated to pay by reason of liability imposed by law or assumed under contract or agreement,' arising from 'damages' caused by personal injuries or destruction, or loss of use of tangible property.' The court applied its decision in Powerine I, concluding that the use of the term 'damages' in the policy's central insuring provision was a 'term of limitation of the indemnity obligation under the insuring agreement.'

While the court in Powerine II also looked to the limits of liability provision and its definition of 'ultimate net loss' to support its holding that more than damages were covered under the umbrella policies at issue, the court in County of San Diego found that the limits of liability in the Ace non-standard policy at issue did not expand the scope of potential coverage. The court noted that the limits of liability provision, unlike in Powerine II, had not been incorporated by reference into the central insuring provision. The court further held that the limits of liability provision's main function was 'setting forth of limits of excess liability coverage over the underlying liability limits. (Emphasis in original.)

Read together, the two decisions emphasize the importance of the specific language used in insurance policies rather than broad characterizations of policy types. The decision in Powerine II affords umbrella policy insureds greater assurance that the broader primary coverage promised by umbrella carriers will be honored.

Clyde Hettrick is a partner at Dickstein Shapiro & Oshinsky LLP.