Petition for Writ of Certiorari — Alcan Aluminum Corp. v. Prudential Assurance Co.

Supreme Court brief2000

Ask Donna

What actually matters in this document.

Text

NO.

IN THE

SUPREME COURT OF THE UNITED STATES

ALCAN ALUMINUM CORPORATION

Petitioner,

PRUDENTIAL ASSURANCE COMPANY LIMITED

et al.

Respondents.

On Petition for Writ of Certiorari to the

United States Court of Appeals for the Ninth Circuit

PETITION FOR WRIT OF CERTIORARI

Lawrence A. Salibra, II

Counsel of Record

Elisa P. Pizzino

Alcan Aluminum Corporation

6060 Parkland Boulevard

Mayfield Heights, Ohio 44124-4185

(440) 423-6918

Attorneys for Petitioner

Alcan Aluminum Corporation

A ET III

QUESTION PRESENTED

Does a federal court of appeals comply with the letter and

spirit of Erie v. Tompkins when it routinely and as a matter of

practice disposes of appeals in diversity cases by issuing

unpublished orders that resolve matters governed by state law

without regard for state court precedent.

RULE 14(b) — LIST OF PARTIES

Prudential Assurance Company Limited, absorbed into the

Prudential Assurance Company of England Property & Casualty

(Canada) acquired by General Accident Indemnity Company, part

of the General Accident Assurance Company of Canada; Certain

Underwriters at Lloyd's Of London, Continental Insurance

Company; Orion Insurance Company Limited; The London &

Overseas Insurance Company Limited; The Home Insurance

Company; Commercial Union Assurance Company Of Canada

Limited.

RULE 29.6--STATEMENT

Petitioner, Alcan Aluminum Corporation is a wholly owned

subsidiary of Alcan Aluminium Limited, a corporation organized

and existing under the laws of Canada.

S01. (itn sed DUR ete vin dit a EE AS em nano

Streatham) ove

ean ae

RiAaacete i

dink Rl Neat aE tei A i tt Ode

TABLE OF CONTENTS

Page

QUESTION PRESENTED ....0....sssssssssscssssesssssesssssessssesesee

RCE ES TRS TR Re OR TRE i

I Ec ssnsosassonsesovsnnscssonsorcivon i

WIN NET oo sccssscsxvacosarecsosasicacossecracesennseosen iii

Oe IG sais ccaccsnsanccccnccssonsnscavsaseeen vi

UN i ccsccinesvsacocssscnvessancanssssanbeiseon |

daniel l

CONSTITUTIONAL PROVISIONS AND

THE STATUTE INVOLVED...0....scscsssssssssssssseessssseescsseeseen l

Set ht Lo 2

REASONS FOR GRANTING THE

WIRET OF CERTIORARE .o.ccccccaasasscse secs csesccsssssnssssoconscssssee 6

I. REFUSAL BY FEDERAL COURTS TO DEFER

TO STATE COURTS IN CONSTRUING AND

APPLYING STATE LAW AS REQUIRED BY

THIS COURT IN ERIE V. TOMPKINS VIOLATES

THE PRINCIPLES OF FEDERALISM EMBODIED

IN THE UNITED STATES CONSTITUTION ...........

A. The Law Of California Concerning The Obligations

~ Of Insurers To Respond To Their Policy Limits For

Progressive Injury That Occurs Outside Of Their

Policy Period Once Their Policy Is Triggered Is

ENON, AUG WIMOUIRIVOCRN, . 050k sce ceasccecncess

B. Under The Law Of California It Is Clear That Alcan

Was Entitled To Prejudgment Interest For The

Defense Costs It Incurred And The Amounts It Was

PE PEI av vinienicacsernncascnaccusscscenne sevens

C. Federal Courts That Refuse To Apply State Law

With Which They Disagree Unconstitutionally

Interfere With State Sovereignty As Delegated

By the Constitution. .........ccceceseeeesessseseeeeenensenenenens 19

Il. THIS COURT SHOULD TAKE THIS CASE TO

DEMONSTRATE TO LOWER COURTS THAT

FAILURE TO ISSUE A PUBLISHED OPINION

WILL NOT IMMUNIZE THEM FROM REVIEW

BY THIS COURT...........:ccccccccsccssssossceressscsncccssessssanccaves 21

CONCLUSION .............ccccccccssssssocsssscessceseescsssncscessoescossnanaces 27

APPENDIX:

Alcan Aluminum Corporation v. Prudential Assurance

Company Limited, et al Memorandum, March 31, 1999

5 dee Sun Sg AWih66 se RKME EES SRERE ENEBRESSDSEEECTS SSA SEED AR RDA NS EROS ESEREDS RAMONE IEE eG

Aerojet-General Corp. v. Transport Indemnity Corp.,

17 Cal. 4th 38, 70 Cal. Rptr. 2d 118, 948 P.2d 909 ( 1997).

«aod fo ask pa ey geks bell dMad On bhse eusede tessa RASPEERMOOROeMeOARNON NOR’ Pre non: se ie er

Alcan Aluminum Corporation v. Prudential Assurance

Company Limited, et al Order, June 24, 1999

TABLE OF AUTHORITIES

Cases:

Aerojet-General Corp. v. Transport Indemnity Corp.,

948 P.2d 909 (1997).

nun NOSSGG808869050090000060060000006000000800000600000000006600R00008

1,4,5,7,8,9,11,12, 15

American National Fire Ins. Co. v. B & 1. T; rucking &

Construction Co., 951 P.2d 250 ( 1998).

Tn tne eS MOSRURRR ORES UESSECSOESSSSERGEESE RSS EEDEREEE SitannSbeEhdbanadeéddbdabaakacedbaadasacude

Armstrong World Industries, Inc. v. Aetna C. asualty & Surety Co.,

52 Cal. Rptr. 2d 690 (1996)

California Pacific Homes, Inc. v. Scottsdale Insurance Co.,

83 Cal. Rptr. 2d 328 (1999)

Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938).

snbsNAnennbpnaddebbehsessshabebeassuaiteneussesendseaiosunbueden: 6,12,16,19,20,21,24, 26

Friends of the Earth v. Gaston, 179 F.3d 107 (4th Cir. 1999) 25

Hartford & Indemnity v. Sequoia Insurance Co..

260 Cal. Rptr. 190 (1989) oo... ee eeccecceeceecceeceeccece. 18

Highlands Insurance Co. v. Continental Casualty Co.,

64 F.3d 514 (Gt Cir, 1995) ooo cc cccccccssssssscssssssssseseecescesse 17

Montrose Chemical Corp. v. Superior Court,

OE PB FUSS (RDG) acs sscnsasssnescnsnsiamunersasmssasarneusel ics 2

Montrose Chemical Corp. v. Admiral Ins. Co..

eb Si eee aS 2,3,9

;

vil

National Fire Insurance Co., v. Showa Shipping Co.,

GED, BO TAG ie, WI aia iiiceciiectticectteres 17,18, 19

Newman, et al v. J.B. Stringfellow, Jr., et. al., State of

California County of Riverside, Superior Court

Nos. 165994 (MF) and related cases

Public Interest Research Group of New Jersey v. Magnesium

Elektron, Inc., 913 F.2d 64 (3d Cir. 1990)

siciditeiblecbbddaissiadia ehdediissidiinditeaadhciedidmanisstukuasmuded deg adsaibebdazubieahed 25

Public tnterest Research Group of New Jersey v. Magnesium

Elektron, Inc., 123 F.3d 111 (3d Cir. 1997)

ecsiah easeshan edlels ti luntialRleaia aan iRise la delundensideiinicssiaseatess 25

State of California v. Pacific Indemnity Co.,

75 Cal. Rptr. 2d 69 (1998)

NON EER REE ME MAS et AN DEN RIPE ER I RE MINT T RR IN 5,12

Syntex Corp. v. Lowsley-Williams and Co.,

Fe ee re Cr ietisesssciscstineniupessniainsastainndesaninn’ 5,10,12

Trident Center v. Connecticut General Life Insurance,

847 F.2d 564 (9D Cir, 1988).......ccccccccsescssescsseessseesseeessees . 20

U.S. v. J.B. Stringfellow, Jr., et al, Civ. No. 83-2501 JMI (Mx)

(Ee S50) otf od i Eo (| nmr oF) 2 ae

Wisper Corp. v. California Commerce Bank,

FF a es I ik shncnsicccancibcaseeicisiauacnscnhsaosaaianinss ; 19

Constitutional Provisions

a l

vill

Statutes

Fan, PR OE OO. TE iicchasncctcanctssnsusnavascanisanscs 2

Sn GE Ee GI ioiseriniinssinssioanssaisansabbarnissanaan 1,16, 17

Other Authority:

Pamela Foa, A Snake in the Path of the Law: The Seventh

Circuit's Non-Publication Rule,

FP Uh, WET E. Big BM, SO ENT FATED: cacssnssccsnsnsannrssannnirarosonce 23,24

William L. Reynolds and William M. Richman, The Non-

Precedential Precedent—Limited Publication and

No-Citation Rules in the United States Courts of Appeals,

Fee CAE Bi BU. RAT Ca iiisisesiniicdnsecrsvsinncionatnonin tas

William L. Reynolds and William M. Richman, An

Evaluation of Limited Publication in the United States

Courts of Appeals: The Price of Reform,

48 U. CHI. L. REV. 573 (1981)

Clifford Taylor, The Judiciary is Too Powerful,

JUDICATURE, July-Aug. 1998, at 28, 32 occas 23

L. Gordon Crovitz, Rescuing Contracts From High Weirdness,

OA, TOR Bag FUME, Fa TN, I eccinisctiintdcceceostcnsttronaa 20

OPINIONS BELOW

The Opinion of the Ninth Circuit Court of Appeals concluded

that the law of the State Of California as promulgated by the

California Supreme Court precludes Alcan (1) from recovering

under its triggered comprehensive general liability (“CGL”)

policies for continuous harm that extends beyond the policy

period, and (2) an award of pre-judgment interest. This opinion of

the Ninth Circuit dated March 31, 1999 is reprinted and set forth

in the attached Appendix at A-1. The Opinion of the Supreme

Court of California in Aerojet-General Corp. v. Transport

Indemnity Corp., 948 P.2d 909 (1997), which is the controlling

case law, is reprinted and set forth in the Appendix at A-11.

Alcan’s request for Rehearing with a Suggestion for Rehearing En

Banc was denied by Order dated June 24, 1999, and is set forth in

the Appendix at A-82.

JURISDICTION

The United States Court of Appeals For the Ninth Circuit

entered its judgment on March 31, 1999 and Alcan’s Petition for

Rehearing En Banc was denied on June 24, 1999. On September

13, 1999 The Honorable Justice O’Connor extended Alcan’s time

to file a petition for writ of certiorari up to and including October

22, 1999. The Jurisdiction of this Court rests on 28 U.S.C. §

1257(a).

THE CONSTITUTIONAL PROVISIONS

AND STATUTES INVOLVED

U. S. Const. art. X

CAL. CIV. CODE §3287(a)

STATEMENT OF THE CASE

This case is an insurance coverage action that arose out of a

cost recovery action under the Comprehensive Environmental

Response, Compensation, and Liability Act, (42 U.S.C. Section

9601 et seq. “CERCLA”),! and a private toxic tort suit,2

involving the Stringfellow waste disposal facility in Riverside,

California. (“Stringfellow Site”). Stringfellow was one of the

first and most notable CERCLA cost recovery actions in the

history of the statute. This litigation also spawned much of the

recent insurance coverage litigation related to issues of coverage

for environmental injuries in California. See Montrose Chemical

Corp. v. Superior Court, 861 P.2d 1153 (1993) (“Montrose

I”)(“release” is an “event”) and Montrose Chemical Corp. v.

Admiral Ins. Co., 913 P.2d 878, (1995) (“Montrose II”) (the

“trigger” for CGL policies in progressive injury context is based

on the theory of “continuous trigger”).

Alcan placed all of its insurers on notice of the Stringfellow

and Newman lawsuits and all denied coverage. Alcan undertook

its own defense and after numerous years of litigation a settlement

was reached in the Newman action and a consent decree was

entered in the Stringfellow action with respect to a portion of the

Stringfellow Site. In 1994, Alcan sued those of its insurers whose

policy periods were in effect during the time of disposal at the

Stringfellow Site. The trial court entered its decision in that case

in 1997.

In 1995, the California Supreme Court issued its ruling in

Montrose II which determined that coverage situations such as

Alcan’s would be governed by the doctrine of “continuous

' US. v. JB. Stringfellow, Jr., et al, Civ. No. 83-2501 JMI (Mx) (U.S.D.C. C.D.

Cal. 1983)

2 Newman, et al v. J.B. Stringfellow, Jr., et. al., State of California, Riverside

County Superior Court Case No. 165994 (MF) and related cases (1985)

eR ASH

Bd BFK.

oN,

aE WR BP ia WISIN des

208) RR EAE SS PRCA SARA TO RAN AT ct ea

A a ala eB a eI 0d tah ATC Sl

Seiya Liber ret Slr

trigger.”3 Continuous trigger means that policies are triggered if

the policy period covers the time when the harm is first caused—

and liability continues up to and including the time when liability

is established. In the Stringfellow action, for example, harm was

stipulated to have occurred instantaneously from the time of

disposal up to and including the time at which liability was

imposed by the federal district court in 1989, a period of 24 years.

Since Alcan had insurance that covered all those periods, then all

of those policies were triggered and each insurer had an obligation

to indemnify Alcan and provide a defense or pay the costs of a

defense. The insurers would then allocate those obligations

among themselves based on equitable principles of contribution.

Alcan did not have any insurance coverage after 1972.

Although it elected to self-insure its primary coverage and

defense costs beginning in the late 80’s, this decision had no

practical impact on coverage for the cases at issue in this

litigation. Coverage exclusions known as “pollution exclusions”

were introduced by the insurance industry in 1972. The trial court

concluded that under California law these exclusions precluded

coverage in both the Stringfellow and Newman cases. So, as a

practical matter, whether Alcan elected to purchase insurance, self

insure, or not insure, the net effect is that for the type of injury

involved in the Stringfellow and Newman actions, there was no

coverage after 1972, even in those excess layers of coverage

where Alcan continuously maintained insurance.4

As a result of the California Supreme Court’s decision in

Montrose II to adopt the principle of continuous trigger, insurers

3 See Montrose II, stating “...the continuous injury trigger of coverage should be

adopted for claims of continuous or progressively deteriorating damage or injury

under the third party CGL policies at issue in this case.” 913 P.2d at 901.

4 Various states have construed the pollution exclusion differently. Some would

construe it not to preclude coverage in cases such as those at issue. The

application of the pollution exclusion was construed by the district court in this

case who applied prevailing California law and held that the pollution exclusion

precluded coverage. Alcan did not appeal that ruling.

in California asserted that their coverage was limited to the harm

that occurred during their policy period. In the alternative they

argued that even if their policies were exposed to the policy

limits, in the absence of other insurers who would share that

exposure, they could treat the absence of insurance as though the

insured was an insurance company, and assess a portion of their

obligation to the insured under equitable contribution principles.

In this lawsuit, the insurers pursued both theories in their defense.

They argued that their exposure was limited to the harm that

occurred during their policy period, and they filed cross-claims

against Alcan seeking equitable contribution attributable to

Alcan’s uninsured periods.

Alcan argued that once a policy was triggered, insurers were

obligated under California law to respond to all progressive injury

subject only to the insurer’s policy limits. Further, Alcan asserted

that self-insurance was not equivalent to insurance and therefore

Alcan was not subject to any right of equitable contribution.

Alcan’s position was consistent with a recent California Appellate

Court decision, Armstrong World Industries, Inc. v. Aetna

Casualty & Surety Co., 52 Cal. Rptr. 2d 690 ( 1996).

While Alcan’s case was in the federal district court, there was

a contrary holding supporting the insurers position. See Aerojet-

General Corp. v. Transport Indemnity Corp., 948 P.2d 909

(1997). The trial court in Alcan’s case elected to follow the

Aerojet decision by the California Court of Appeals. Alcan

appealed that decision to the Ninth Circuit. Not long after the

trial court’s ruling in Alcan’s case, however, the California

Supreme Court decided to review Aerojet. The result of that

decision by the California Supreme Court resolved the conflict

between the intermediate appellate courts regarding the insurance

coverage and allocation issues.

The California Supreme Court rendered its decision during

the pendency of Alcan’s appeal before the Ninth Circuit Court of

Appeals. In addition, while Alcan’s appeal was pending, three

A ae tet | ley lal, ty

California Courts of Appeal applied the Supreme Court’s decision

in Aerojet.) In addition, the Supreme Court of Washington

applied and adopted the Aerojet decision as the law of the state of

Washington.© Each of these courts clearly and unequivocally

stated that the law of California as clarified by Aerojet did not

limit coverage for progressive injuries to the harm that occurred

only during its policy period. These cases provided that once a

CGL policy is triggered in a progressive injury context, the

insurer was obligated to respond to all harm subject only to its

policy limits.

Notwithstanding the clarity and overwhelming authority

concerning the state of the law in California, the Ninth Circuit

refused to apply it. Citing an irrelevant portion of the Aerojet

opinion relating to mixed claims’ the Ninth Circuit held, in an

unpublished memorandum, that triggered CGL policies were

not responsible for continuous or progressive harm that occurred

after the policy period expired.

Alcan filed a Motion for Reconsideration with a Suggestion

for Rehearing En Banc. In that motion Alcan pointed out that

every case construing Aerojet was in direct conflict and

irreconcilable with its holding in this case and that the Ninth

Circuit neither acknowledged these conflicts or tried to reconcile

the numerous conflicting cases. The motion emphasized the

obligation of a federal court exercising diversity jurisdiction to

apply state substantive law even though it may disagree with the

manner in which the Supreme Court of that state resolved policy

disputes in promulgating that state’s law. The Ninth Circuit

denied the motion without comment.

*California Pacific Homes, Inc. v. Scottsdale Insurance Co., 83 Cal. Rptr. 2d 328

(1999); State of California v. Pacific Indemnity Co., 75 Cal. Rptr. 2d 69 (1998);

Syntex Corp. v. Lowsley-Williams and Co., 79 Cal. Rptr. 2d 371 (1998).

P.2d 250 (1998).

7 See Appendix at A-S.

REASONS FOR GRANTING THE

WRIT OF CERTIORARI

I. REFUSAL BY FEDERAL COURTS TO DEFER TO

STATE COURTS IN CONSTRUING AND APPLYING

STATE LAW AS REQUIRED BY THIS COURT IN

ERIE V. TOMPKINS® VIOLATES THE PRINCIPLES

OF FEDERALISM EMBODIED IN THE UNITED

STATES CONSTITUTION

A. The Law Of California Concerning The Obligations

Of Insurers To Respond To Their Policy Limits For

Progressive Injury That Occurs Outside Of Their

Policy Period Once Their Policy Is Triggered Is

Explicit And Unequivocal.

The facts surrounding Alcan’s disposal and the environmental

harm at the Stringfellow Site are undisputed and established by

stipulations of the parties. Alcan disposed of various industrial

waste products at the Stringfellow Site starting in 1965 when it

acquired the Riverside, California facility until the Stringfellow

Site was closed in mid 1972. Each of Alcan’s insurers had

policies that covered a period during which the disposals were

made. It was stipulated by the parties that injury from the

disposals was immediate and that the period of continuous trigger

covered the period from the first disposal in 1965 until 1989,

when the Federal District Court for the Central District of

California imposed liability on Alcan in the Stringfellow action.

In the Newman action the parties stipulated that the continuous

trigger period would be from the time of the disposals until the

settlement.

In 1972, the insurance industry introduced the pollution

exclusion into all CGL policies. The District Court in this case

concluded, based on Califomia law, that these exclusions

8Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938).

aise aire tacian Meaiigh

aa A LEP ER OARS RAAB PG RE a 8 AR BE nel chalice hhh

precluded coverage for the type of environmental injury that was

at issue in this case. Alcan did not appeal this issue. Therefore,

after the introduction of these exclusions in the middle of 1972,

Alcan had no insurance coverage for the pollution at issue.

There was no dispute between Alcan and its insurers that each

of the policies was triggered. The policy limits of the policies that

did not contain pollution exclusions were also well in excess of

the amount necessary to cover all of Alcan’s liability and defense

costs. These amounts were also not in dispute. There were only

two purely legal issues to be resolved by the district court that are

the subject of this Petition. The first was whether the insurance

policies had to respond to their limits once triggered or could they

limit their liability to the harm that occurred during the policy

period. The second issue was whether California law required the

insurers to pay prejudgment interest.

The California Supreme Court definitively resolved the law of

California on the first issue in the Aerojet case while Alcan’s

appeal was pending in the Ninth Circuit. In that case, the

California Supreme Court clarified that once a policy is triggered,

as long “some harm results within the policy period”, the insurer

must respond to its policy limits:

It [the policy] is triggered if the specified harm is

caused by an included occurrence, n9 so long as at

least some such harm results within the policy

period. (Montrose Chemical Corp. v. Admiral Ins.

Co. supra, 10 Cal. 4¢h at pp. 669-673.) It extends to

all specified harm caused by an included occurence

even if some harm results beyond the policy period.

(See id. at p. 686). In other words, if specified harm

is caused by an included occurrence and results, at

least in part, within the policy period, it perdures to

all points of time at which some such harm results

thereafter. n.10. To illustrate by a hypothetical

similar to the present case: Insurer has a duty to

indemnify Insured for those sums that Insured

becomes legally obligated to pay as damages for

property damage caused by its discharge of

hazardous substances, up to a limit of $1 million.

Insured discharges such a substance. It thereby

Causes property damage to Neighbor’s land, in the

amount of $100,000 (determined by the cost of

returning the soil to its original condition), within

the policy period of year |. It causes further damage

of this sort as the substance spreads under the

surface, in the amount of $100,000 annually in year

two through year thirty. Insured must pay neighbor

$3 million damages under judgment. Insurer must

pay the Insured the [policy] limit of $1 million for

indemnification.

Aerojet, supra, 948 P.2d at 919-920..

The example given by the California Supreme Court describes

the exact situation in this case, except that Alcan’s policy limits

exceeded the amount Alcan was required to pay in both the

Stringfellow and the Newman actions. The Ninth Circuit simply

ignored this clear example of how the law of California was to be

applied. Instead, in a brief section entitled “Allocation of Costs to

Alcan’s Period of Self-Insurance”, the Ninth Circuit opined that

Aerojet concluded that in the above example, the insurer would

only be obligated to pay $100,000 for the injury that occurred

during its policy period. In Support of this theory, the Ninth

Circuit Court made a general reference to Aerojet by citing to the

entire page 71 of that decision. It was careful not to make any

specific reference to Aerojet. The Ninth Circuit’s hesitation to

quote a specific portion of the Aerojet Opinion to supports its

decision occurred because Aerojet quite explicitly limited the

ability to allocate exclusively to situations were the “acts or

omissions” giving rise to the injury occurred after the policy

period expired:

Bint hae

oe a Lae Ci ee Tne

a denial:

ee ae, Sen ae

It follows that, if it [the insurer] carries the burden

of proof by a preponderance of the evidence, each

insurer may allocate defense costs to Aerojet for any

part of the single broad “mixed” claim presented in

the governmental and private actions that was not

even potentially covered because it did not even

possibly embrace any triggering harm of the

specified sort within its policy period or periods

caused by an included occurrence.

Id. at 909. (emphasis added).

It is not possible for this to be the basis for the allocation in this

case where the acts and omissions occurred during the policy

period, and the injuries were continuing and progressive.

The California Supreme Court made it clear that policies are

triggered by occurrences (i.e. acts or omissions) within the policy

period, not when continuous injuries from those occurrences

result.? The Ninth Circuit does not accept this doctrine, and

concedes there are no triggering occurrences during Alcan’s self-

insured period. It concedes, however, that all policies were

triggered. Given these factors, the Ninth Circuit still attempts to

convert the progressive injuries in this case into individual

triggering events by calling them “triggering injuries” Appendix

at A-7. This is a patent refusal to apply California law which

requires a policy to respond to all continuous or progressive

injuries once a policy is triggered. !0

9 The Ninth Circuit defined the “trigger” in Alcan’s case as being the “exposure”

of a person or property to the harm, or the “manifestation” of the injury, and,

therefore concluded that the insurance policies were not in effect during the

“triggering injury”. The Ninth Circuit ignored the adopted definition of “trigger”

set forth by Montrose II, Aerojet, and several other California cases which reject

the “exposure” and “manifestation” theories. See Generally, Montrose II, 913

P.2d at 901-902.

10 See Supra, n. 4 and related text; see also Armstrong World Industries, Inc. v.

AETNA Casualty & Surety Co., 52 Cal. Rptr. 2d 690, 702 (1996) stating “As

mentioned above, the California Supreme Court, after reviewing the various

In addition to Aerojet, there were three California Appellate

Court cases and one case by the Supreme Court of Washington

that discussed and applied Aerojet. These cases were decided

before the decision of the Ninth Circuit in this case. They were

brought to the Ninth Circuit’s attention prior to the time it

rendered its decision and again in a Motion for Rehearing with a

Request for Rehearing En Banc because the Ninth Circuit failed to

even attempt to reconcile the obvious conflict between its

characterization of the case and the cases construing Aerojet.

Petitioner believes that the Ninth Circuit’s refusal to acknowledge

this conflict demonstrates that the Ninth Circuit was aware that its

decision was inconsistent with California law.

Most notable among the cases construing Aerojet is Syntex

Corporation v. Lowsley-Williams and Co., 79 Cal. Rptr. 2d 37]

(1998), where Lloyd’s, also a defendant in this case, lost precisely

the same argument in the California Courts that it prevailed on in

this case before the Ninth Circuit. Lloyd’s argued in Syntex that

its liability in a progressive injury context was limited to the harm

that occurred during the policy period. The California Appellate

Court rejected that argument as wholly without merit:

London insurers raise one final issue with which we

find no merit. n.11. All of the insurance policies

state in relevant part that London Insurer was

obligated to “indemnify the Assured for all sums

which the Assured shall be obligated to pay by

reason of liability[P]...1mposed upon the Assured

by law...[P]..[P] for damages, direct or

consequential and expenses [**52] on account

of...[P]...[P]...Property Damage, [P]...[P] caused

by or arising out of each occurrence....”(Italics

judicially recognized triggers, has concluded that a continuous trigger should be

applied to claims of continuous or progressive deteriorating damage or

injury....That is, the continuous trigger pertains to the duration of coverage

providing coverage throughout successive policy periods.”

added.) The trial court interpreted the “all sums”

clause in phase I as follows: “Once a policy is

i triggered by an occurrence resulting in damages

oe during the policy term, the scope of the insurers’

obligation is to pay for all damages resulting from

: that occurrence, even those occurring beyond the

policy period.” London Insurers contend that this

interpretation is incorrect, and that London Insurers

was obligated only with respect to damage which

occurs during the policy period.

After the initial briefs in this case were filed, but

before we issued our initial decision in this matter

and before the petition for rehearing was filed, our

i Supreme Court decided this issue. Aerojet-General

Corp. v. Transport Indemnity Co. (1997) Cal. 4th

38, 56-57, 948 P.2d 909, held that the “all sums”

clause in standard CGL policies obligate an insurer

to indemnify an insured for “all specified harm

caused by an included occurrence, even if some

such harm results beyond the policy period.

[Citation] In other words, if specified harm is

: caused by an included occurrence and results, at

4 least in part, within the policy period, it perdures to

all points of time at which some such hard results

thereafter.” (See id. At p. 57 fn. 10; Armstrong

World Trade Industries, Inc. v. Aetna Casualty &

Surety Co. (1966) 45 Cal. App. 4A 1, 50, 105, 52

Cal. Rptr. 2d 690). Because the court's decision in

Aerojet-General is binding on us, we reject London

F Insurers’ argument and affirm the trial court on this

| issue. (Auto Equity Sales, Inc. v. Superior Court

(1962) 57 Cal. 2d 450, 455, 20 Cal Rptr. 321, 369

P.2d 937).

Id. at 388-389.

The failure of the Ninth Circuit to distinguish Syntex

demonstrates that the Ninth Circuit was unwilling to adhere to this

Court’s directive in Erie.

In addition to Syntex two additional California Appellate

Court cases and one case of the Supreme Court of The State Of

Washington applied the law of the State of California as it was

described by the California Supreme Court in Aerojet.//

In State of California v. Pacific Indemnity Co., 75 Cal. Rptr.

2d 69 (1998), the California Court of Appeals addressed a factual

situation that is the same as this case:

In Aerojet, the Supreme Court considered a

hypothetical example remarkably close to the facts

of this case. In the example, an insurer was

assumed to have issued a policy for one year

coverage, and the insured was assumed to have

caused progressively deteriorating [***77] bodily

injury or property damage of a kind covered in this

policy over a thirty-year [**20] period. (Aerojet,

supra, 17 Cal. 4th at p. 73) The insured was sued on

a claim that asserted the damage it covered extended

to the entire 30-year period. Under these

circumstances, the insured had a contractual right to

a defense by the insurer of the entire claim if all the

years of the claims were at least potentially covered.

The court explained: ‘[Y]Jear one might possibly

have embraced some triggering harm of the

specified sort caused by an included occurrence, and

year two through thirty might possibly have

embraced some such harm resulting therefrom. By

contrast, its right would be prophylactic if some of

the years of the claim were at least potentially

covered and the others were not, on the ground that

Il See supra n. 3 and n. 4

eerie,

ARM Sd athe OA,

fridh seabigs ae me

the first year might possibly have embraced some

triggering harm of the specified sort caused by an

included occurrence, but some of the succeeding 29

years might possibly have embraced some such

harm resulting therefrom and the others did not even

possibly do so.” (Id. at p. 74) If damage could have

been caused only after the policy expired, the

insurer could seek reimbursement from the insured.

(Id at p. 75).

The Aerojet court rejected an argument that the

insured should contribute to defense costs, holding

that equitable contribution applies only between

insurers. (Aerojet, supra, 17 Cal. 4th at p. 73) “Ina

strict sense, ‘self insurance’ is a ‘misnomer.’

[Citations]...’[SJelf-insurance ...is equivalent to no

insurance. As such, it is repugnant to the [very]

concept of insurance...’ [Citation] If insurance

requires an undertaking by one to indemnify

another, it cannot be satisfied by a self-contradictory

undertaking by one to indemnify oneself.” (Ibid., fn.

20, italics in original.)

The comprehensive general liability insurance

policy in this case covered property damage, and

Pacific Indemnity does not dispute that at least some

of the claims were potentially covered. This

triggered Pacific Indemnity’s contractual duty to

defend claims potentially covered. (Boss, supra, 16

Cal. 4th at p. 46) \ts prophylactic duty required it to

defend the entire action, even if not all tlaims were

potentially covered. (Id at pp. 48-49) Pacific

Indemnity’s argument that its duty to defend should

be apportioned with its insured based on the one

year of its coverage is contrary to California law.

Id. at 76-77.

A similar fact situation was again addressed by a California

Court of Appeals in California Pacific Homes, Inc. v. Scottsdale

Insurance Co., 83 Cal. Rptr. 2d 328 (1999). Scottsdale sought to

limit its coverage obligations in the progressive injury context to

the harm that occurred during its policy period. The Appellate

Court rejected this argument pointing out that once a policy was

triggered, the obligation of the insurer extended to all harm

subject only to the policy limits:

[A]s our Supreme Court in Aerojet noted the event

which triggers coverage does not define the scope of

coverage because once the coverage is triggered the

policy obligates the insurer to indemnify for the

insured’s entire loss, subject to the terms of the

policy limits. (Aerojet-General Corp. v. Transport

Indemnify Co., supra, 17 Cal. 4th 38 57, fn. 10,

quoting with approval Armstrong World Industries,

Inc. v. Aetna Casualty & Surety Co., supra, 45 Ca.

App. 4th 1, 105.) The Aerojet opinion went on to

reiterate the Montrose analysis to the effect that

successive insurers on the risk when continuous or

progressively deteriorating property damage first

manifests itself are separately and independently

obligated to indemnity the insured. (Aerojet-

General Corp. v. Transport Indemnity Co., supra,

17 Cal. 4th at pp.38, 57, fn. 10). In the present case

the insured made a demand under a single policy

and the amount of the insured’s ultimate net loss as

calculated under the settlement allocation was

within the policy limits for one occurrence under

that single policy. How these insurers choose to

proceed as between themselves is not before us.

Id. at 332.

The Supreme Court of the State of Washington had the

opportunity to review Aerojet. The Washington Supreme Court's

interpretation of California law as promulgated in Aerojet, is in

direct and irreconcilable conflict with that of the Ninth Circuit. In

American National Fire Insurance Co. v. B&L Trucking Co., 951

P.2d 250 (1998) the Supreme Court of Washington faced

precisely the same issue involved in this case:

: The issue before us is whether pollution cleanup

costs should be allocated between insurer and

insured when the pollution occurred over many

j years and the insured was insured during only a

portion of the entire polluting period.

B & L Trucking, Supra, 951 P.2d at 253.

, The Supreme Court of Washington adopted the same position

P as that adopted by the California Supreme Court of California in

Aerojet in resolving that issue:

We hold that once a policy is triggered, the policy

language requires insurer to pay all sums for which

the insured becomes legally obligated, up to the

policy limits. n7 Once coverage is triggered in one

or more policy periods, those policies provide full

coverage for all continuing damage, without any

allocation between insurer and insured. See Aerojet-

Gen v. Transport Indem. Co. 17 Cal 4th 38, 948 P2d

' 909, 70 Cal Rptr. 2d 118, 128 (1997) (“if specified

harm is caused by an included occurrence and

results, at least in part, within the policy period, it

perdures to all points of time at which at least some

harm results thereafter”).

Id. at 256-257. (emphasis added)

The example from the Aerojet case and the subsequent cases

from the California Courts and the Supreme Court of Washington

State demonstrate that the law of California concerning the

obligations of triggered insurance policies in progressive injury

context to respond to their policy limits to all harm resulting from

the triggering event, even if it extends outside of the policy

period, is clear and unequivocal. The failure of the Ninth Circuit

to reconcile these cases demonstrates that the Ninth Circuit

intentionally refused to apply California law as required by this

Court’s direction in Erie.

B. Under The Law Of California It Is Clear That Alcan

Was Entitled To Prejudgment Interest For The

Defense Costs It Incurred And The Amounts It Was

Required To Pay.

California law clearly provides for prejudgment interest for

judgment amounts which are “certain” or “capable of being made

certain by calculation.” CAL. CIV. CODE §3287(a). The trial court

concluded that Alcan was entitled to prejudgment interest in the

Newman action (the personal injury action) because it was finally

concluded, and the amount of legal fees and potential liability was

certain. The trial court concluded the amount was uncertain in the

Stringfellow action (the environmental clean-up action) because

the litigation was ongoing and therefore the final amount of legal

fees and liability had yet to be determined. Both Alcan and the

insurers appealed. Alcan argued that the costs in the Stringfellow

action were just as “certain” as the costs in the Newman action.

The only difference being that in Newman, there was no dispute

who was going to pay what portion of the total cost. The only

difference, then, between Newman and Stringfellow costs, was in

the allocation, and not in the amount. The amount was stipulated

to and was always certain. In terms of who was going to pay what

amount was the only open question. This type of unknown factor

is not what makes an amount “uncertain” for purposes of Section

3287(a). This is supported by the very case law that the Ninth

Circuit used to reverse the award of prejudgment interest.

ae Een Te Oe ee eR

The Ninth Circuit, relying on another Ninth Circuit case that

applied California law, !2 held that since there was a dispute as to

the amount owed, Alcan was not entitled to prejudgment interest.

The Ninth Circuit stated that only when the issue was /iability and

not the amount owed would prejudgment interest be available.

The Ninth Circuit’s characterization that the amount owed was in

dispute is simply wrong. All parties stipulated to what Alcan was

liable for—the only disagreement went to allocation of that

known number.

The law in Califomia is clear that disagreement as to

allocation of a known amount, does not defeat the “certainty”

requirement under CAL. CIV. CODE §3287(a). The Ninth Circuit

in applying California Law in Highlands Insurance Co. v.

Continental Casualty Co., 64 F.3d 514 (9th Cir. 1995) explains:

Continental argues that an award of prejudgment

interest was inappropriate in this case because the

extent of Highland’s comparative fault and failure to

mitigate had to be judicially determined before the

amount of damages were made certain.

Continental’s claims must fail.... The issue before

the district court regarding damages was whether a

comparative fault defense would even be available

to Continental. This was a pure question of law that

depended upon resolution of the prioritization of the

policies. | While a factual dispute respecting

damages will preclude a grant of prejudgment

interest under §3287(a), a /ega/ dispute will not.

Id. at 521 (emphasis supplied). It is interesting to note that Judge

Brunetti who sat for the Ninth Circuit during the Highlands case

also sat in this case—that opinion was published—this one was

not.

'2 National Fire Insurance Co., v. Showa Shipping Co., 47 F.3d 316 (9th Cir.

1995).

In addition, a California district court held in Hartford

Accident & Indemnity v. Sequoia Insurance Co., 260 Cal. Rptr.

190 (1989) that:

Assuming Hartford was entitled to recover damages

[this fact was stipulated to in Alcan’s case], the only

question remaining was how the trial court would

prioritize the policies. In this respect, the trial court had

only two options: (1) to hold, as it did, that the Sequoia

policy was second in order and that the Hartford and

Transamerica policies share the excess liability on a

prorata basis, or (2) that the Hartford Umbrella policy

and the combined limits of the Sequoia and

Transamerica policies be prorated. This was purely a

question of law [as in Alcan’s case] since the amount of

damages under either formula was readily ascertainable

by mathematical calculation. Thus, the amount of

damages was never “unliquidated” or “contingent” but

rather, only the legally proper order of priority of the

respective policies was _ uncertain. Under these

circumstances, Hartford is entitled to prejudgment

interest.

Id. at 202.

In finding that Alcan was not entitled to prejudgment interest

in either the Newman or the Stringfellow action, the Ninth Circuit

relied on Showa. Showa, 47 F.3d at 324. Showa involved a

situation of equitable contribution, where the extent of the liability

could not be determined until factual disputes were resolved

concerning each party’s share. In Showa there was a bench trial

where numerous factual issues were resolved in establishing

liability and its extent. In this case there were no factual disputes.

The facts were stipulated, including the amount of Alcan’s total

liability, and the court was presented with pure legal issues. A

more recent California Court of Appeals case, Wisper,!3 removes

all doubt that the prejudgment interest only is precluded on

disputed amounts where determination of the amount at issue

“depends on a judicial determination based on conflicting

evidence and is not ascertainable from the truthful data supplied

by the claimant to his debtor.” Wisper, 57 Cal. Rptr. 2d. at 148.

That is clearly not this case.

However, what makes it abundantly clear that the Ninth

Circuit deviated from California law with respect to prejudgment

interest was the fact that it precluded Alcan from recovering

prejudgment interest from the amount the insurers conceded they

owed once liability was established. The insurers first insisted

they had no liability. When the district court held they were liable

for a prorata amount of Alcan’s cost, the parties stipulated to that

amount. There were no disputed facts resolved by the court to

determine that amount. It was Alcan alone who asserted it was

owed more. It is inconceivable that a fair reading of California

law is that a party who insists it is owed more than the minimum

agreed among the parties is not entitled to prejudgment interest on

the undisputed minimum. However, that is precisely what the

Ninth Circuit concluded. No case including Showa supports that

position.

C. Federal Courts That Refuse To Apply State Law With

Which They Disagree Unconstitutionally Interfere

With State Sovereignty As Delegated By the

Constitution.

In Erie this court acknowledged the principle embodied in our

constitution that preserves to the states those areas of the law that

are not specifically authorized or delegated to the United States.

In the same vein, this Court recognized that except for these

limited areas, the independence of both the state legislature and

’ Wisper Corp. v. California Commerce Bank, 57 Cal. Rptr. 2d 141 (1996).

the state judiciary must be preserved. These fundamental

principles are at stake in this case.

In Erie this Court was confronted with a refusal by the federal

courts to apply state law. Although the context of Erie involved

the question of whether federal courts were permitted to apply a

“general common law” in areas where states had not explicitly

legislated, there was a candid recognition by this Court that more

than a doctrinal issue was at stake. This Court recognized that

federal judges had in many instances used the doctrine as “a

convenient mode for brushing aside the law of a State in conflict

with their views.” Erie, 304 U.S. at 78.

The propensity for imposing one’s views for those of a state

judiciary or legislature with which you disagree, is no less

prevalent in the federal judiciary today than in the days of Erie.

Moreover, the fact that the federal courts in California have

resisted applying California law in diversity cases has gained

notoriety in the national press.!4 Lower courts have failed to

apply state law in California and even imposed sanctions on

parties trying to take advantage of state law and the Ninth Circuit

has openly ridiculed state law while reluctantly applying it.

What has changed is the “mode” for circumventing state law.

No federal court would explicitly disagree with state law — such a

confrontation would invite reversal. Instead, as this case

'4 See L. Gordon Crovitz, Rescuing Contracts From High Weirdness, WALL ST.

J., Aug. 3, 1988, at 18. Quoting Judge Kozinski’s Ninth Circuit opinion that

reversed a district court judge in California for its failure to apply California state

law, and using that case as an example, the article made a very important

observation about the federal judiciary: “There is a method in Judge Kozinski's

apparent madness. He [Judge Kozinski] insists that judicial restraint means that

federal judges must be bound by the precedents of state courts when interpreting

state law, no matter how awful, until the precedents are changed.” See also

Judge Kozinski’s opinion, Trident Center v. Connecticut General Life Insurance,

847 F.2d 564 (9th Cir. 1988)] stating “It may not be a wise rule we are applying,

but it is a rule that binds us. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78, 82

L.Ed. 1188, 58 S. Ct. 817 (1938) n7.”. Trident Center, 847 F.2d at 569-570.

illustrates, sham characterizations of state law have been

substituted for what was once deemed “general common law”.

However, changing the characterization of the federal court

disagreement with the state court does not change the reality of

what is happening.

In Erie, this Court enumerated the adverse consequences of

allowing federal courts to ignore state law in diversity cases. It

acknowledged that the “confusion and injustice” which resulted

had convinced some that diversity jurisdiction should be

abolished. See Erie, 304 U.S. at 77. The confusion and injustice

is even more pernicious under these circumstances where the

federal courts are not honestly identifying their departure from

state law. To the extent these opinions are available as precedent,

they simply operate to confuse state law and mislead those who

are honestly trying to evaluate the legal consequences of their

action.

Petitioner can understand the reluctance this Court may have

in reviewing state law. However, there is no alternative to insure

that federal courts are not simply using diversity jurisdiction to

frustrate state law. The overwhelming case law that conflicts with

the Ninth Circuit’s decision in this case and the Circuit’s inability

to confront that case law is virtually an explicit acknowledgment

that the Ninth Circuit’s action was inconsistent with California

law, and reflects its intention to frustrate its application.

Il. THIS COURT SHOULD TAKE THIS CASE TO

DEMONSTRATE TO LOWER COURTS’ THAT

FAILURE TO ISSUE A WRITTEN PUBLISHED

OPINION WILL NOT IMMUNIZE THEM FROM

REVIEW BY THIS COURT.

This issue of non-publication, non-citation rules has been a

matter of subdued but significant concern by judges,

commentators and lawyers. Most notable in the literature is the

recognition that these rules reduce judicial accountability and

weaken the quality of judicial decisions. One commentator

summarized the critical literature on the practice as follows:

[The practice under these rules has been uniformly

condemned by commentators, lawyers, and judges.

These criticisms seem well founded. First, there is the

danger that without the pressure created by a need to

expose its reasons to public scrutiny the court will

decide a case without reasons or with inadequate ones.

This is not to suggest that a court would consciously

decide to decide a case arbitrarily, but most who have

done legal writing would agree that the process of

committing words to paper often tests the structure of

the argument and perhaps even the result. Absent the

discipline imposed by the requirement that some

written record be produced, sloppy logic or first

impressions may govern. As Karl Llewellyn observed:

“ ‘Affirmed on the authority of Older v. Younger’

may say the same thing and mean the same as ‘The

case falls within the reason of Lader v. Younger.

Affirmed.’ But in from two to six cases out of ten

the latter phrasing runs a real chance of inducing a

longer and deeper look at the controlling case, in a

way in which controlling cases should be looked

at.”

“The Non-Precedential Precedent—Limited Publication and No-

Citation Rules in the United States Courts of Appeals”, 78

COLUM. L. REV. 1167, 1175 (1978).

The justification for limited publication rests on three

premises. First, it rests on the belief that there is no need to

publish all opinions. Second, it rests on the assumption that full

publication is costly. And third, it is assumed judges can

effectively determine when an opinion need be published. The

existing studies appear to refute the validity of these premises.

Commentators uniformly reject the first premise as founded

on an overly mechanical view regarding the development of the

common law!5 The corollary to the second premise, which is

that limited publication will increase the productivity of the

courts, is not supported by the empirical data.!6 Although the

result may be a faster result, these results were not without serious

shortcomings. One of the most telling aspects of the conclusion is

the author’s reiteration of the “pernicious effect on judicial

responsibility.” !7

The notion of importance of transparency in judicial action to

insure accountability has found more recent expression by the

Chief Justice of the Michigan Supreme Court in the context of the

intense debate over judicial independence inspired by public

criticism of judicial actions by members of the other branches of

the government. !8 Justice Clifford Taylor stated:

Similarly, citizens’ and other groups should pay

attention. This also may require formal

monitoring of decisions and focusing public

attention on offending decisions and judges who

authored them.

JUDICATURE at 32.

'S Reynolds & Richman, An Evaluation of Limited Publication in the

United States Courts of Appeals: The Price of Reform”, 48 U. CHI.

L.REV. 573, 579 (1981). See Also Pamela Foa, A Snake in The Path of

the Law: The Seventh Circuit's Non-Publication Rule”, 39 U. PITT. L.

REV. 309 (1977-78).

'°U. CHI. L. REV. at 631.

'7 Id. at 631.

18 Clifford Taylor, The Judiciary is Too Powerful, JUDICATURE, July-Aug. 1998,

28, 32.

It is difficult to imagine anything more effective in defeating

Justice Taylor’s suggestion to insure judicial accountability than

the non-publication rule.

However, of the three premises, that which is most troubling

and most threatening to the judicial process is the notion that

judges can decide which cases need to be published. An empirical

study of the Seventh Circuit refutes the premises that judges’

discernment in this area is wise:

The dangers evident in the use of non-publication

and non-citation rules argue that one must be

skeptical of any proposal to lighten the judicial

workload by requiring judges to decide, inter alia. if

cases before them are important. For however one

ultimately weighs the cumulative loss to the bar of

the foregoing, this analysis of unreported orders

undermines the view that the risk is negligible—that

: judges can, with sufficient accuracy, distinguish in

difficult cases that which is or might be of value

from that which is not or could not be. Their error

can, in turn, dangerously erode the basic structure of

our system of law—and it will perforce do so

unobserved.

39 U. PITT. L. REV. at 339-340.

Of even greater concern than the ability of the courts to live

up to expectations when acting in the most impartial fashion, is

the potential to misuse these rules when, as this court noted in

Erie, judges may which to “brush aside” state law in conflict with

their views. See Erie, 304 U.S. at 78. The non-publication, non

citation rules give judges a virtual license to determine when they

will be appealed by hampering this Court’s review and potentially

trivializing the profound.

iiashi casita

Recent examples of the potential for abuse do exist. For

example, in Public Interest Research Group of New Jersey v.

Magnesium Elektron, Inc., 913 F.2d 64 (3d Cir. 1990), MEI

challenged the plaintiffs standing on an interlocutory basis after

an injunction was granted. MEI argued that the district court

‘holding that injury to the environment and personal injury existed

as a matter of undisputed fact was unsupported by credible

scientific evidence, and therefore summary judgment on standing

was seriously flawed. MEI pointed out in great detail that its

permit excursions were not technically capable of causing the

harm of which the plaintiffs complained. The Third Circuit

refused to address any of the scientific issues raised and affirmed

the district court without opinion. This Court denied certiorari~

At the hearing in the penalty phase, the trial court was

required to write a comprehensive opinion on the scientific

evidence and concluded, not surprisingly, that the permit

excursion caused neither environmental nor harm to the plaintiffs.

Nonetheless the district court imposed the maximum penalty by

characterizing certain administrative anomalies as “serious”.

There is little doubt from the record of this case that the district

court was intent on a given outcome, but the requirement of

having to write an opinion ultimately protected MEI’s legal rights.

Upon a second appeal, PRG v. MEI, 123 F.3d 111 (3d Cir. 1997)

(MEI II), the Third Circuit reversed for lack of standing. The

Fourth Circuit recently followed MEI II. Friends of the Earth v.

Gaston, 179 F.3d 107 (4th Cir. 1999).

Unfortunately the opportunity when second opinions are

created to correct errors resulting from their absence in the first

instance are rare. Therefore, this Court’s vigilance must be

particularly acute when justice is rendered in silence.

In this case, the Ninth Circuit was compelled to issue an

Opinion in a form that would prevent its use as precedent because

of the obvious conflict with compelling California authority that

immediately preceded it. In addition, by making the opinion non-

precedential and not publishing its opinion, the Ninth Circuit

undoubtedly believes it has enhanced the likelihood that its

actions would not be subject to review. If this happens, the Ninth

Circuit will not only have effectively denied Alcan fair treatment,

its failure to publish the opinion will operate to deceive similarly

situated litigants seeking to determine their rights under

California Law. What these litigants will find, is extensive

authority from the California courts and The Supreme Court of

Washington upon which they will base their legal position.

However, if they are unlucky enough to be in federal court, they

will never know until it is too late that the doctrine that those

cases described will have little relevance to the outcome of their

case.

This result is precisely the type of injustice and confusion that

this Court sought to prevent in Erie. This Court should take this

case or, in the alternative, summarily reverse with instructions to

the Ninth Circuit to order the district court to enter judgment

against the plaintiffs whose policies were triggered to the extent

of their policy limits and permit Alcan to recover prejudgment

interest in both the Federal and Newman actions.

CONCLUSION

This case raises crucial issues of accountability, consistency

and predictability that deserve and require the attention of this

Court. For all the foregoing reasons, Petitioner Alcan Aluminum

Corporation respectfully requests that this Honorable Court grant

its Petition for Writ of Certiorari.

Respectfully submitted,

Lawrence A. Salibra, II

Elisa P. Pizzino

Alcan Aluminum Corporation

6060 Parkland Boulevard

Mayfield Heights OH 44124-4185

(440) 423-6918

‘Attorneys for petitioner

Alcan Aluminum Corporation

ALUMINUM CORPORATION, | Plaintiff-counter-defendant-

Appellant, vs. PRUDENTIAL ASSURANCE COMPANY

LIMITED, absorbed into THE PRUDENTIAL ASSURANCE

COMPANY OF ENGLAND PROPERTY & CASUALTY

(CANADA) acquired by GENERAL ACCIDENT INDEMNITY

COMPANY, part of the GENERAL ACCIDENT ASSURANCE

COMPANY OF CANADA; CERTAIN UNDERWRITERS AT

LLOYD'S OF LONDON, _ Defendants-counter-claimants-

Appellees, CONTINENTAL INSURANCE COMPANY; ORION

INSURANCE COMPANY LIMITED; THE LONDON &

OVERSEAS INSURANCE COMPANY LIMITED; THE HOME

INSURANCE COMPANY; Defendants-Appellees,

COMMERCIAL UNION ASSURANCE COMPANY OF

CANADA LIMITED, Defendant-cross-defendant-Appellee.

ALCAN ALUMINUM CORPORATION, | Plaintiff-counter-

defendant-Appellee, vs. PRUDENTIAL ASSURANCE

COMPANY LIMITED, absorbed into THE PRUDENTIAL

ASSURANCE COMPANY OF ENGLAND PROPERTY &

CASUALTY (CANADA) acquired by GENERAL ACCIDENT

INDEMNITY COMPANY, part of the GENERAL ACCIDENT

ASSURANCE COMPANY OF CANADA, Defendant-counter-

claimant-Appellant, CONTINENTAL INSURANCE

COMPANY; ORION INSURANCE COMPANY LIMITED;

THE LONDON & OVERSEAS INSURANCE COMPANY

LIMITED; THE HOME INSURANCE COMPANY; Defendants,

COMMERCIAL UNION ASSURANCE COMPANY OF

CANADA LIMITED, Defendant-cross-defendant, CERTAIN

UNDERWRITERS AT LLOYD'S OF LONDON, Defendant-

counter-claimant. ALCAN ALUMINUM CORPORATION,

Plaintiff-counter-defendant-Appellant, PRUDENTIAL

ASSURANCE COMPANY LIMITED, absorbed into THE

PRUDENTIAL ASSURANCE COMPANY OF ENGLAND

PROPERTY & CASUALTY (CANADA) acquired by

GENERAL ACCIDENT INDEMNITY COMPANY, part of THE

GENERAL ACCIDENT ASSURANCE COMPANY OF

A-2

CANADA, Defendant, and CERTAIN UNDERWRITERS AT

LLOYD'S OF LONDON, Defendant-counter-claimant-Appellee.

No. 97-55931, No. 97-56235, No. 98-55448

UNITED STATES COURT OF APPEALS FOR THE

NINTH CIRCUIT

1999 U.S. App. LEXIS 6012

March 31, 1999, Filed

NOTICE: [*1] RULES OF THE NINTH CIRCUIT COURT

OF APPEALS MAY LIMIT CITATION TO UNPUBLISHED

OPINIONS. PLEASE REFER TO THE RULES OF THE

UNITED STATES COURT OF APPEALS FOR THIS CIRCUIT.

SUBSEQUENT HISTORY: Reported in Table Case Format at:

1999 U.S. App. LEXIS 127835.

PRIOR HISTORY: Appeal from the United States District Court

for the Central District of California. D.C. No. CV-94-02202-DT,

D.C. No. CV-94-02202-DT, D.C. No. CV-94-02202-DT. Dickran

M. Tevrizian, District Judge, Presiding.

DISPOSITION: AFFIRMED IN PART AND REVERSED IN

PART. COSTS AWARDED TO DEFENDANTS-APPELLEES

GENERAL, LLOYD'S, HOME, AND CONTINENTAL.

JUDGES: BEFORE: GOODWIN, BRUNETTI, and T.G.

NELSON, Circuit Judges.

OPINION: MEMORANDUM n!

nl This disposition is not appropriate for publication and

may not be cited to or by the courts of this circuit except as

provided by 9th Cir. R. 36-3.

A-3

Alcan Aluminum Corporation ("Alcan") filed this insurance

coverage action against the appellees General Accident Indemnity

Company ("General"), Certain Underwriters at Lloyd's of London

("Lloyd's"), The Home Insurance Company ("Home"), and

Continental Insurance Company ("Continental") [*2] seeking

defense costs and indemnification for liabilities arising out of the

Stringfellow and Newman actions. The district court granted

summary judgment in favor of Continental concluding that

Continental had no obligation to defend or indemnify Alcan

because the pollution exclusion contained in the Continental

insurance policy precluded any coverage in favor of Alcan. The

district court granted partial summary judgment in favor of

General, Lloyd's, and Home concluding that Alcan had a duty to

share in the liabilities arising from the Stringfellow and Newman

actions because the period of loss included Alcan's period of self-

insurance. The district court entered a final judgment allocating

the liabilities among Alcan and the various insurers based on the

stipulations adopted by the parties. Alcan appeals from the district

court's final judgment and General cross-appeals. We have

jurisdiction pursuant to 28 U.S.C. § 129] and affirm in part and

reverse in part.

1. Alcan v. Continental

Under California law, the insurer's duty to defend is broader

than the duty to indemnify. See Horace Mann Ins. Co. v. Barbara

B., 4 Cal. 4th 1076, 1081, 846 P.2d 792 [*3] (1993). The

insurer has a duty to defend whenever the third party complaint

creates a "bare potential" or "possibility" of coverage under the

insurance policy. See Montrose Chem. Corp. v. Superior Court, 6

Cal. 4th 287, 300, 861 P.2d 1153 (1993). "The insured may not

speculate about unpled third party claims to manufacture

coverage," Hurley Constr. Co. v. State Farm Fire & Cas. Co., 10

Cal. App. 4th 533, 538 (Ct. App. 1992), and "the insurer need not

defend if the third party complaint can by no conceivable theory

raise a single issue which could bring it within the policy

coverage." Montrose Chem. Corp., 6 Cal. 4th at 300 (quoting

A-4

Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 276 n.15, 54 Cal. Rptr.

104, 419 P.2d 168 (1966)).

The district court concluded that "because the pollution

exclusion [in Continental's insurance policy] operates to preclude

coverage, Continental has no obligation to reimburse Alcan for

any settlement paid or for any defense or legal costs incurred as a

matter of law." Alcan does not contest in this Court the district

court's conclusion that the pollution exclusion precluded coverage

and has, therefore, waived that issue on appeal. See Reynolds

[*4] v. County of San Diego, 84 F.3d 1162, 1166 n.3 (9th Cir.

1996); Harrell v. 20th Century Ins. Co., 934 F.2d 203, 206 n.2

(9th Cir. 1991). By not contesting the district court's finding that

the pollution exclusion precludes coverage, Alcan has conceded

that Continental has no obligation to pay any settlement or

defense costs incurred by Alcan because when an insurance policy

precludes any possibility of coverage there is no duty to defend or

indemnify. See Montrose Chem. Corp., 6 Cal. 4th at 300; Gray,

65 Cal. 2d at 276 n.15.

Alcan's argument in regard to whether the district court erred in

characterizing Continental's insurance policy as an indemnity

policy rather than a liability policy is irrelevant. It does not matter

if the insurance policy is an indemnity policy or a liability policy

because when coverage is precluded by the language of the policy

the insurer has no duty to defend or indemnify. See Montrose

Chem. Corp., 6 Cal. 4th at 300; Gray, 65 Cal. 2d at 276. Because

the district court concluded that the pollution exclusion precluded

coverage and because Alcan does not contest that conclusion in

this Court, the district court's order granting Continental [*5]

summary judgment is affirmed.

2. Alcan v. General, Lloyd's and Home

A. Allocation of Costs to Alcan's Period of Self-Insurance n2

n2 We reject the argument asserted by Lloyd's that Alcan

lacks standing to appeal the district court's final judgment. In

all of the written stipulations, the parties explicitly "reserved

the right to contest the relevancy of any facts so stipulated in

any future proceeding in this action." Alcan has standing to

appeal the district court's final judgment because Alcan has

reserved the right to challenge the relevancy of the stipulated

facts and the stipulations will be irrelevant if costs cannot be

allocated to Alcan.

Under California law, an insurer may allocate to the insured

any defense costs for an injury or claim that arise from a

triggering injury which does not occur during the insured's

applicable policy period. See Aerojet-General Corp. v. Transport

Indemnity Co., 17 Cal. 4th 38, 71, 948 P.2d 909 (1997).

Therefore, when a successive insurance policy [*6] - is triggered

under the continuous trigger theory of coverage (i.e., when a

covered injury caused by a covered occurrence occurs, continues,

or deteriorates during the policy period, see Montrose Chemical

Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 675, 913 P.2d 878

(1995)), the insurer whose policy is triggered may still allocate

costs to the insured that are attributable to triggering injuries

occurring before or after the effective dates of the insured’s

policies. See Aerojet, 17 Cal. 4th at 71.

The district court did not err when it concluded that a share of

the defense and indemnity costs arising from the Stringfellow and

Newman actions must be allocated to Alcan. The appellees’

insurance policies were triggered because the injuries underlying

the Stringfellow and Newman actions occurred, continued, or

deteriorated during the effective dates of the appellee's policies,

but the appellees are not independently responsible for all the

costs attributable to the Stringfellow and Newman actions. See

Montrose, 10 Cal. 4th at 675, 681 n.19. The appellees can allocate

to Alcan those costs attributable to injuries occurring, continuing,

or deteriorating [*7] during Alcan's period of self-insurance, not

because Alcan was self-insured, but because those injuries are

A-6

triggering injuries that occurred after the appellees’ policies

expired for which they cannot be held liable. See Aerojet, 17 Cal.

4th at 71. Accordingly, the district court did not err when it

concluded that Alcan would be responsible for those costs arising

out of the Stringfellow and Newman actions attributable to

injuries occurring during Alcan's period of self-insurance.

B. Pre-judgment Interest

California Civil Code § 3287 reads: "Every person who is

entitled to recover damages certain, or capable of being made

certain by calculation, and the right to recover which is vested in

him upon a particular day, is entitled also to recover interest

thereon from that day . . .." Damages are certain or capable of

being made certain when the dispute between the parties centers

on the issue of liability and there is essentially no dispute between

the parties in regard to the computation or allocation of damages.

See National Union Fire Ins. Co. v. Showa Shipping Co., 47 F.3d

316, 324 (9th Cir. 1995) (citing Fireman's Fund Ins. Co. v.

Allstate Ins. Co., [*8] 234 Cal. App. 3d 1154, 1173, 286 Cal.

Rptr. 146 (Ct. App. 1991); Harsany v. Cessna Aircraft Co., 148

Cal. App. 3d 1139, 1143-45, 196 Cal. Rptr. 374 (Ct. App. 1983)).

Alcan is not entitled to pre-judgment interest in this case because

the dispute in this case centers on the issue of how costs should be

allocated to each party and not whether the parties are liable for

costs arising out of the Stringfellow and Newman actions. See

National Union Fire Ins., 47 F.3d at 324.

The fact that Alcan settled the Newman action prior to filing

this lawsuit does not mean that the damages were certain or

capable of being made certain. See id. To be sure, the amount that

Alcan contributed to the Newman settlement was certain, but

General's share of that settlement remained uncertain because all

of the parties in this case, including Alcan, contested how the

costs of the settlement should be allocated. The case against pre-

judgment interest in regard to the Stringfellow action is even

stronger than the case against pre-judgment interest in regard to

A-7

the Newman action because the Stringfellow action is still

pending and, therefore, even Alcan's costs arising [*9] from the

Stringfellow action are uncertain and not capable of being made

certain. The district court's denial of prejudgment interest in

regard to the Stringfellow action is affirmed and the district

court's grant of prejudgment interest in regard to the Newman

action is reversed.

C. Newman Plaintiffs Exposed After General's Policy Expired

Insurance coverage is triggered when a covered harm is caused

by a covered occurrence and results, at least in part, during the

policy period. Aerojet, 17 Cal. 4th at 56. “In other words, if

specified harm is caused by an included occurrence and results, at

least in part, within the policy period, it perdures to all points of

time at which some such harm results thereafter." /d. at 57. The

bodily harm and property damage suffered by the Newman

claimants who were exposed after the General policy expired

could not, therefore, trigger General's insurance policy and costs

attributable to those Newman claimants cannot be allocated to

General because the Newman claimants who moved to the

Stringfellow cite after the expiration of General's policy could not

have manifested bodily injury or suffered property damage [*10]

(covered harms) when the General policy was in effect. See id. at

56-57.

Aerojet mandates this conclusion. An insurer whose policy is

triggered may allocate to the insured any costs that arise from

triggering injuries which occur before or after the policy's

effective dates. See Aerojet, 17 Cal. 4th at 71. If costs attributable

to injuries occurring after a policy's effective dates can be

allocated to an insured party even after an insurance policy is

triggered, coverage can not extend to harms occurring after the

policy expires simply because similar harms occurred when the

policy was in effect. General is, therefore, not liable for costs

attributable to the Newman plaintiffs who were only exposed to

. A-8

hazardous materials after General's policy expired and the district

court's decision in this regard is reversed.

The issue of how costs arising out of the Newman action should

be allocated to General in light of the district court's erroneous

ruling has been resolved by the parties. The parties stipulated that,

if General is not liable for costs attributable to Newman plaintiffs

who were only exposed after General's policy expired, General

would be liable to [*11] Alcan for indemnity in the amount of

$51,448.52 and for defense costs in the amount of $2,091.38. In

light of this stipulation, Alcan can only recover a total of

$53,538.90 from General for costs arising out of the Newman

action.

D. Pre-litigation Settlement Between Alcan and Commercial

Union

"Contribution among insurers is permitted where one insurer

pays a loss or defends a claim for which another insurer shares

responsibility." Maryland Cas. Co. v. Nationwide Ins. Co., 65 Cal.

App. 4th 21, 26 (Ct. App. 1998). General does not contest in this

court the district court's conclusions that General and Commercial

do not share liability for costs attributable to the Stringfellow and

Newman actions and that the settlement between Commercial and

Alcan was purely contractual and has, therefore, waived these

issues on appeal. See Dilley v. Gunn, 64 F.3d 1365, 1367 n.1 (9th

Cir. 1995).

General cannot seek a setoff based on the settlement between

Alcan and Commercial because General does not argue that it and

Commercial share liability for costs attributable to the

Stringfellow and Newman actions or contest the conclusion that

the settlement between [*12] Commercial and Alcan was purely

contractual. A setoff, like contribution, can only be obtained when

the parties share liability and General has, as noted above, made

no showing that it and Commercial share liability or contested the

district court's findings to the contrary. General does not even

A-9

contest the district court's finding that Commercial had no duty to

defend or indemnify Alcan. General and Alcan clearly do not

share liability for the costs attributable to the Stringfellow and

Newman actions if Commercial had no duty to defend or

indemnify Alcan and General cannot, therefore, seek contribution

from Commercial or obtain a set-off based on the Commercial

Alcan settlement. The district court's decision denying General a

setoff is affirmed.

E. The Supersedeas Bond n3

n3 We reject the argument asserted by Lloyd's that this Court

should strike Alcan's brief for this appeal because the brief

fails to comply with the Federal Rules of Appellate Procedure

and Ninth Circuit Rules. Although Alcan could have been

more thorough in its citations to the record and more explicit

in its identification of the applicable standard of review,

Alcan's brief is not so deficient as to warrant it being stricken

by this Court. See, e.g., M/S Corp. v. Liberty Mut. Ins. Co., 127

F.3d 1145 (9th Cir. 1997); Mitchel v. General Elec. Co., 689

F.2d 877 (9th Cir. 1982).

[(*13]

The district court did not err when it stayed execution of the

judgment against Lloyd's and allowed Lloyd's to file a

supersedeas bond because once Alcan filed its appeal challenging

the merits of the district court's allocation order, the execution of

the judgment against its insurers was automatically stayed. See

Bronson & Soutter v. La Crosse & Milwaukee R.R., 68 U.S. 405,

409-10, 17 L. Ed. 616 (1863). The supersedeas bond actually

provided Alcan protection that it was not entitled to because a

bond was not required to stay the execution of the judgment in

this case.

3. Conclusion

A-10

The district court's order granting Continental summary

judgment is AFFIRMED.

The district court's order allocating to Alcan a share of the

defense and indemnity costs arising out of the Stringfellow and

Newman actions is AFFIRMED.

The district court's decision denying Alcan pre-judgment

interest in regard to the Stringfellow costs is AFFIRMED.

The district court's decision granting Alcan pre-judgment

interest in regard to the Newman costs is REVERSED.

The district court's decision allocating costs to General that were

attributable to the [*14] Newman plaintiffs who were exposed

to hazardous materials after the last General policy expired is

REVERSED.

The district court's decision denying General a set-off based on

the pre-litigation settlement between Alcan and Commercial is

AFFIRMED.

The district court's order staying the execution of the judgment

in favor Alcan and allowing Lloyd's to post a supersedeas bond is

AFFIRMED.

AFFIRMED IN PART AND REVERSED IN PART.

COSTS AWARDED TO DEFENDANTS-APPELLEES

GENERAL, LLOYD'S, HOME, AND CONTINENTAL.

A-11

AEROJET-GENERAL CORPORATION et al., Cross-

complainants and Appellants, v. TRANSPORT INDEMNITY

COMPANY et al., Cross-defendants and Respondents.

No. S054501.

SUPREME COURT OF CALIFORNIA

17 Cal. 4th 38; 948 P.2d 909; 1997 Cal. LEXIS 8343; 70

Cal.

Rptr. 2d 118; 46 ERC (BNA) 1025; 97 Cal. Daily Op.

Service

9704; 97 Daily Journal DAR 15551; 28 ELR 20590

December 29, 1997, Decided

SUBSEQUENT HISTORY: [***1]

As Modified March 11, 1998. Rehearing Denied March 11,

1998, Reported at: /998 Cal. LEXIS 1467.

PRIOR HISTORY: Superior Court of San Mateo County. Super.

Ct. No. 262425. John J. Bible, Judge.

COUNSEL:

Jose N. Uranga, Nossaman, Guthner, Knox & Elliott, Scott P.

DeVries, Kurt W. Melchior, Carl L. Blumenstein and Tad

Pethybridge for Cross-complainants and Appellants.

Daniel E. Lungren, Attorney General, John A. Saurenman,

Deputy Attorney General, Cotkin & Collins, Roger W. Simpson,

Brobeck, Phleger & Harrison, William R. Irwin, Donald W.

Brown, Tom M. Freeman, Edith M. Hofmeister, Munger, Tolles

& Olson, Cary B. Lerman, Charles D. Siegal, Howrey & Simon,

Robert H. Shulman, John E. Heintz, Mindy C. Davis, Heller,

Ehrman, White & McAuliffe, David B. Goodwin, Brian P.

A-12

Brosnahan, Joshua Koltun, Anderson, Kill & Olick, Jordan S.

Stanzler, Deborah M. Mongan and John A. MacDonald as Amici

Curiae on behalf of Cross-complainants and Appellants.

Francis J. Stillman, Loraine A. Wallace, Michael Skaggs, Rivkin,

Radler & Kremer, Donald McMillan, George Keller, Bishop,

Barry, Howe, Haney & Ryder, Jeffrey N. Haney, William R.

Brown, Boornazian, Jensen & Garthe, Bruce Winkleman, Carroll,

Burdick & [***2] McDonough, James B. Clapp, Horvitz &

Levy, Barry R. Levy, Mitchell C. Tilner, Gibson, Dunn &

Crutcher, Donald E. Sloan, Crosby, Heafey, Roach & May,

Stephen G. Schrey, Louise M. McCabe, Gordon & Rees, Donald

W. Rees, David C. Capell, Haasis, Pope & Correll, Kenneth E.

Goates, Hancock, Rothert & Bunshoft, Richard L. Seabolt,

Andrew K. Gordon, Brian A. Kelly, Laura G. Hill, Arthur J.

Friedman, Hardin, Cook, Loper, Engel & Bergez, Ralph A.

Lombardi, Hoge, Fenton, Jones & Appel, Robert Cullen, Jedeikin,

Green, Meadows & Schneider, Nancy A. Aptekar, Lillick &

Charles, Donald E. Dorfman, James Forbes, Long & Levit, Ira

Goldberg, Luce, Forward, Hamilton & Scripps, Cathy L.

Croshaw, Mitchell L. Lathrop, Lynberg & Watkins, R. Jeff

Carlisle, Wendy E. Schultz, Misciagna & Colombatto, P. Richard

Colombatto, Morris, Polich & Purdy, Steven M. Crane, Mike

Colliau, J. Burleigh Amold, Newton, Kastner & Remmel, Stephen

Newton, O'Melveny & Myers, Martin S. Checov, Orrick,

Herrington & Sutcliffe, Jeffrey S. White, Pruess, Walker &

Shanagher, Gary T. Walker, Ropers, Majeski, Kohn, Bentley,

Wagner & Kane, Ropers, Majeski, Kohn & Bentley, Richard K.

Wilson, Sedgwick, Detert, Moran & Amold, Roger Sleight,

[***3] Jeffrey Miller, Skadden, Arps, Slate, Meagher & Flom,

Irene Sullivan, Thomas R. Harrell, Wilson, Elser, Moskowitz,

Edelman & Dicker, Debra S. Sturmer and Stephen P. Randall for

Cross-defendants and Respondents.

Sinnott, Dito, Moura & Puebla, Randolph P. Sinnott, Wiley, Rein

& Fielding, Laura A. Foggan, Joseph L. Ruby and Andrew L.

A-13

Wexton as Amici Curiae on behalf of Cross-defendants and

Respondents.

JUDGES: Opinion by Mosk, J., with George, C. J., Werdegar, and

Brown, JJ., concurring. Concurring and dissenting opinions by

Kennard, J., and by Chin, J., with Baxter, J., concurring.

OPINIONBY: MOSK

OPINION: [*45] [**912]

MOSK, J.

In this cause, we resolve two issues relating to standard

commercial general liability insurance policies, which were

formerly called comprehensive general liability insurance

policies. The first question is whether site investigation expenses-

-broadly, expenses for determining the existence, nature, extent,

effect, etc., of the discharge of hazardous substances at a location-

-may constitute defense costs that the insurer must incur in

fulfilling its duty to defend. The second is whether defense costs

may be allocated to the insured. As [***4] we shall explain, we

conclude that, as to each, the answer is qualifiedly affirmative.

This is still another chapter in the yet-to-be-completed volume

relating the story of Aerojet-General Corporation in Sacramento

County. (See, e.g., [*46] Mangini v. Aerojet-General Corp.

(1996) 12 Cal. 4th 1087 [51 Cal. Rptr. 2d 272, 912 P.2d 1220];

Aerojet-General Corp. v. Transport Indemnity Insurance (1993)

18 Cal. App. 4th 996 [22 Cal. Rptr. 2d 862]; Mangini v. Aerojet-

General Corp. (1991) 230 Cal. App. 3d 1125 [281 Cal. Rptr.

827]; Aerojet-General Corp. v. Superior Court (1 989) 211 Cal.

App. 3d 216 [257 Cal. Rptr. 621].) Aerojet-General Corporation

is, and has been, a leading manufacturer in the aerospace and

defense markets. Throughout the course of its operations from the

1 pais) adAPOD BN Oo Di ach GW Md eid enc ht Rg Aha fiat aml PEA aga 9 Haida Mand Seas NEA U Cea oe ARR ME

Naren WI ae:

ae AOE har Sehr MP AOR Ta Tint RAND

A-14

early 1950's into the 1980's, it discharged hazardous substances,

including trichloroethylene, in an ongoing fashion at its

Sacramento site and thereby caused pollution in and around that

location as such substances spread onto the ground, into the

groundwater, and beyond toward the American River.

In 1982, Transport Indemnity Company and Associated

International Insurance Company (hereafter [***5] collectively

Transport Indemnity) filed a complaint for declaratory relief in

the Superior Court of San Mateo County, which was docketed

under No. 262425, against, inter alios, numerous other insurers

and their common insureds, Aerojet-General Corporation and its

wholly owned subsidiary Cordova Chemical Company (hereafter

collectively Aerojet), regarding the parties’ rights and duties under

various comprehensive general liability and other insurance

policies. nl It appears that what was stated above was already

known or believed--that, throughout the course of its operations

from the early 1950's into the 1980's, Aerojet had discharged

hazardous substances in an ongoing fashion at its Sacramento site

and had thereby caused pollution in and around that location

resulting in continuous and/or progressively deteriorating bodily

injury and/or property damage. In its complaint, Transport

Indemnity sought declarations including that it was not obligated

to provide, and Aerojet was not entitled to receive, either

indemnification or defense.

nl As would subsequently appear, Aerojet's policies included

"manuscript" as well as "standard" ones. Policies "are usually

issued on standard forms containing terms and conditions

drafted by the [insurer]. Often, the insurer is willing to modify

or change the standard forms by '‘endorsements' .

Sometimes, the policy issued is entirely nonstandard and

drafted for the particular risk undertaken"--a so-called

"manuscript" policy. (Croskey et al., Cal. Practice Guide:

Insurance Litigation 1 (The Rutter Group 1997) P 3:33, p. 3-

6.)

A-15

[***6]

Aerojet, which had been represented by independent counsel

since about 1979, filed a cross-complaint for declaratory and other

relief against, inter alios, Transport Indemnity and other of its

insurers--which, for convenience's sake, will generally be referred

to without differentiation as "the insurers." |

Aerojet later filed an amended cross-complaint--the one

operative here--against 54 insurers, under 245 comprehensive

general liability and other (*47] insurance policies with periods

incepting as early as 1950 and expiring as late as 1984, as to 3

actions brought by either the United States or the State of

[**913] California and 35 actions brought by private parties,

each of which was based on facts, alleged or otherwise disclosed,

to the effect that, throughout the course of its operations from the

early 1950's into the 1980's, Aerojet discharged hazardous

substances in an ongoing fashion at its Sacramento site and

thereby caused pollution in and around that location resulting in

continuous and/or progressively deteriorating bodily injury and/or |

property damage. The private actions were various. The |

governmental ones were these: (1) an action instituted by the State

of [***7] California against Aerojet in the Superior Court of

Sacramento County in 1979 under authority of, inter alia, the

Porter-Cologne Water Quality Control Act (Wat. Code, § 13000

et seq.), seeking relief including an injunction directing the

company to undertake cleanup, abatement, and remedial work as

to its pollution, and an order requiring the company to reimburse

the state for the costs that the latter had, and would, incur in its

own cleanup, abatement, and remedial work; (2) an action

instituted by the United States against Aerojet in the United States

District Court for the Eastern District of California in 1986 under

authority of, inter alia, the Comprehensive Environmental

Response, Compensation, and Liability Act of 1980 (hereafter

CERCLA) (42 U.S.C. § 9601 et seq.), seeking relief including an

injunction directing the company to abate and remedy its

pollution and its effects, and an order requiring the company to

ra ak i aaa I Ay

SENT ete Sows BR RL

SERN RA Se RS Cie att NR? ir TE MRI he, Bs C0 Mle

A-16

reimburse the United States for so-called "response costs," viz.,

the costs of removal and/or remediation (see 42 U.S.C. §

9601(25)), n2 which the United States had, and would, incur with

regard thereto; and (3) a parallel CERCLA action instituted by the

State of [***8] California against Aerojet on the same day and

in the same court, seeking relief including an order requiring the

company to reimburse the state for the "response costs" that the

latter had, and would, incur; the federal and state CERCLA

actions were consolidated. In its amended cross-complaint,

Aerojet sought, among other things, a declaration that it was

entitled to receive, and the insurers were obligated to provide,

both indemnification and defense. In pertinent part, it alleged to

the [*48] effect that it had tendered the defense, but that the

insurers had either refused or had accepted only under

"unreasonable" reservations of rights.

n2 Under CERCLA, the terms "removal" and "remediation"

bear the following meanings. "Removal" refers to the "cleanup

or removal of released hazardous substances from the

environment, such actions as may be necessary taken in the

event of the threat of release of hazardous substances into the

environment, such actions as may be necessary to monitor,

assess, and evaluate the release or threat of release of

hazardous substances, the disposal of removed material, or the

taking of such other actions as may be necessary to prevent,

minimize, or mitigate damage to the public health or welfare

or to the environment, which may otherwise result from a

release or threat of release." (42 U.S.C. § 9601(23).)

"Remediation" refers to "those actions consistent with

permanent remedy taken instead of or in addition to removal

actions in the event of a release or threatened release of a

hazardous substance into the environment, to prevent or

minimize the release of hazardous substances so that they do

not migrate to cause substantial danger to present or future

public health or welfare or the environment." (Id., § 9601(24).)

[o**9)

A-17

In an opinion certified for publication, the Court of Appeal, First

Appellate District, Division Five, granted a petition for wnt of

mandate submitted by Aerojet to compel the superior court to

vacate an order granting a motion by the insurers for summary

adjudication of certain issues and to enter a new and different

order denying that motion. ( Aerojet-General Corp. v. Superior

Court, supra, 211 Cal. App. 3d at pp. 220-238.) In effect, the

superior court had summarily adjudicated that "response costs"

under CERCLA, and similar costs under the Porter-Cologne

Water Quality Control Act, could not constitute indemnification

costs, ie., expenses to resolve liability, that the insurers had to

incur in fulfilling their duty to indemnify. The Court of Appeal

concluded to the contrary. It therefore caused issuance of a

peremptory writ of mandate as prayed. It did not consider whether

costs of this sort could constitute defense costs, i.¢., expenses to

avoid or at least minimize liability.

Following entry of the dismissal without prejudice of the

complaint by Transport Indemnity, the superior court effectively

transformed Aerojet's cross-action against the insurers [***10]

into an action in and of itself, ordering Aerojet to be designated

"plaintiff and not "cross-complainant" and the insurers to be

[**914] designated "defendants" and not "cross-defendants."

The superior court subsequently ordered the action to be tried in

phases. Phase I would be tried to the court, and would concern

issues such as: (1) the authenticity of certain policies purportedly

issued to Aerojet by some of the insurers, (2) the existence and

wording of certain other policies missing in whole or in part; (3)

the meaning of all such policies; and (4) related questions. Phase

[I would be tried to . jury, and would concern issues such as the

application of the policies proved to the evidence presented in

order to determine whether the insurers had a duty to indemnify

Aerojet. Phase III would be tried to the same jury, and would

concern issues such as: (1) the sum that Aerojet was entitled to

receive from the insurers as a result of any duty to indemnify; (2)

no arene Sy RS carl ae

ae chakra Dad Sb MB CER

A-18

inasmuch as Aerojet's tender of the defense had by now been

accepted by the insurers under certain reservations of rights,

whether, and apparently in what amount, Aerojet was entitled to

receive any additional payment [***11] for defense costs, and

whether, and apparently in what amount, the insurers were

entitled to obtain reimbursement for any such payment already

provided; and (3) whether, and in what amount, the insurers were

liable to Aerojet for so-called "bad faith" damages. Phase IV, if

necessary, would be tried to the court, and would concern issues

such as the allocation among the insurers of any sum determined

to be owing to Aerojet. [*49]

At phase I, the superior court resolved issues concerning the

existence, authenticity, wording, and meaning of various policies

issued or purportedly issued to Aerojet by the insurers.

Specifically, in phase IA, the superior court made

determinations as to existence, authenticity, and wording. From

1956 to 1984, it appears, Aerojet had various comprehensive

general liability insurance policies and similar instruments that

are pertinent here.

In phase IB, the superior court made determinations as to

meaning. By way of background: Prior to 1966, in its insuring

clause the standard comprehensive general liability insurance

policy covered specified harm, such as bodily injury or property

damage, caused by " ‘accident.' " (Croskey et al., Cal. Practice

(***12] Guide: Insurance Litigation 2, supra, P 7:26, p. 7A-8

italics omitted.) In 1966, the form was revised in its insuring

clause to cover specified harm caused by an “ ‘occurrence,’ "

which was defined as an " ‘accident, including injurious exposure

to conditions, which results during the policy period in'" harm of

this sort " 'neither expected nor intended from the standpoint of

the insured.' " (Id., P 7:28, p. 7A-9, italics omitted.) In 1973, the

form was further revised: In its insuring clause, it continued to

cover specified harm caused by an " ‘occurrence,' " but now

defined that term as an " ‘accident, including continuous or

A-19

repeated exposure to conditions, which results in' " harm of this

sort " ‘neither expected nor intended from the standpoint of the

insured.’ " (Id., P 7:29, p. 7A-9, italics omitted.) To return to the

superior court's determinations: Aerojet's comprehensive general

liability insurance policies and similar instruments largely

conformed to the standard ones in applicable aspects. The phrase

"neither expected nor intended” was express in the insuring clause

of some, reflecting Insurance Code section 533, which states that

"{a}n insurer is not liable [***13] fora loss caused by the wilful

act of the insured . . . ." The phrase was implied in the insuring

clause of the rest, through operation of the same provision. The

phrase incorporated a subjective standard as to "intent" but, under

City of Carter Lake v. Aetna Cas. and Sur. (8th Cir. 1979) 604

F.2d 1052, 1058-1059, an objective standard as to "expectation."

If specified harm is "expected" or "intended" by the insured, it is

effectively caused by a “wilful act" within the meaning of

Insurance Code section 533, and hence outside of coverage. From

1976 to 1984, Aerojet's policies, which were issued by the

Insurance Company of North America (hereafter INA), essentially

took a form similar to that of a so-called "fronting" policy, n3 to

the following effect: Although, [**915] in the body, it was

stated that INA had a duty to indemnify Aerojet, by endorsement

it was provided that (1) [*50] INA had a duty to make

payments only beyond stated deductible amounts, which matched

or approached indemnification limits, and (2) in case of Aerojet's

default, INA had a duty to make payments within the stated

deductible amounts and a corresponding right to obtain

reimbursement [***14] therefor; n4 and although, in the body, it

was stated that INA had a duty to defend Aerojet, by endorsement

it was provided that Aerojet should pay its own defense costs--

under which provision it was understood by Aerojet that it should

defend itself. n5

n3 A “fronting” policy has been described as one “which does

not indemnify" or, apparently, defend "the insured but which is

issued to satisfy financial responsibility laws of various"

jurisdictions "by guaranteeing to third persons who are injured

+e mee te

ome

te ee

A-20

that their claims against" the insured "will be paid." (

Columbia Casualty Co. v. Northwestern Nat. Ins. Co. (1991)

231 Cal. App. 3d 457, 471 [282 Cal. Rptr. 389].)

n4 "[I]f there is a conflict in meaning between an endorsement

and the body of the policy, the endorsement controls." (

Continental Cas. Co. v. Phoenix Constr. Co. (1956) 46 Cal. 2d

423, 431 [296 P.2d 801, 57 A.L.R.2d 914].)

n5 See footnote 4, ante.

At phase II, Aerojet and the insurers presented evidence

relevant [***15] to the issue of the duty to indemnify. In

substance, it was established that, throughout the course of its

operations from the early 1950's into the 1980's, Aerojet _

discharged hazardous substances in an ongoing fashion at its

Sacramento site and thereby caused pollution in and around that

location. The superior court charged the jury on the duty to

indemnify. In the course of passing on various motions, it had

previously determined that there was no such duty for periods

before 1956 or after 1979 (specifically, after July 14, 1979). It

submitted the question to the jury whether there was any such

duty for any period from 1956 to 1979. In pertinent part, it

instructed that "Aerojet has no insurance coverage if" specified

harm “is expected or intended from the standpoint of Aerojet.” It

defined "expected" objectively to "denote[] that the actor knew or

should have known that there was a substantial probability that

certain consequences would result from his or her acts or

omissions." By contrast, it defined "intended" subjectively to

“denote[] that the actor desires the consequences of his act or

believes that the consequences are substantially certain to follow."

The jury proceeded [***16] to return a unanimous verdict

determining that there was no duty to indemnify for any period

from 1956 to 1979.

At phase III, the issues to be tried to the jury were limited to a

single one pursuant to a stipulation between Aerojet and certain of

A-21

the insurers other than INA: "What sums, if any, expended by

Aerojet for [site] investigation are defense costs?" In the

stipulation, Aerojet and the insurers agreed, in pertinent part, to

the following effect: In shares determined among themselves, the

insurers had paid, or would pay, as defense costs the expenses that

Aerojet had incurred, or would incur, under the categories of

"legal" and "legal support" through the final disposition of any

appeal Aerojet would [*51] take from any ensuing judgment in

the action; Aerojet and the insurers would litigate whether site

investigation expenses were defense costs, Aerojet and the

insurers would not litigate whether, or in what amount, the

insurers were entitled to obtain reimbursement for Aerojet's

"legal" or “legal support" expenses, oF whether, or in what

amount, the insurers were liable to Aerojet for bad faith damages,

but, in the event of retrial following reversal of the judgment

[***17] on appeal, the insurers could litigate the question of

reimbursement and Aerojet could litigate the question of bad

faith. In another stipulation, Aerojet and the insurers agreed as

follows: Since 1979, Aerojet had incurred as defense costs "legal"

expenses of $5,283,568, and "legal support" expenses of

$5,634,149, for a total of $10,917,717; and, toward that amount,

the insurers had paid $5,680,367, plus interest.

At the outset of phase III, the superior court ruled to the effect

that, generally, site investigation expenses were not defense costs.

It also ruled that defense costs could be allocated to the insured.

Specifically, "Aerojet has held itself out to the world as insured by

LN.A." under its "fronting" comprehensive general liability

insurance policies. "Aerojet has elected not to buy insurance for

defense costs from 1976 on." "Under the court's equitable powers,

Aerojet is responsible for a co-equal allocation of the defense

cost."

{**916] Before the presentation of evidence at phase III, the

superior court preinstructed the jury, in accordance with the ruling

described above, as follows: "In this phase of the trial Aerojet

seeks the costs it incurred [***18] to investigate the pollution at

‘see ed aati ose

A-22

the Sacramento site as costs of defending the litigation filed

against them by the governments and others. [P] All sums that

Aerojet paid, one, because of government orders or requests to

investigate, clean up or remediate, or, [P] two, because of

Aerojet's agreement or commitment to perform the Aerojet

investigation, cleanup or remediation are indemnity expenses, and

therefore not recoverable as defense costs. [P] Investigation costs,

such as investigating the extent of the contamination or the

viability of cleanup options and monitoring the spread of the

wastes from the site, which were incurred as part of Aerojet's

effort to clean up or remediate the site, are not considered defense

costs. [P] If the costs involved here were necessary to or part of

Aerojet's effort to clean up and remediate the site, such costs are

[not] defense costs, even if Aerojet's lawyers used information

developed during the investigation to assist them in negotiating

with the governments to limit Aerojet's obligations to clean up

and to remediate. [P] If any investigation costs did not relate to

any of the purposes described above, but were incurred because

they [***19] were specifically requested by a lawyer and were

reasonable for the purpose of defending Aerojet in litigation, such

investigation costs would be defense costs." [*52]

At phase III, Aerojet and the insurers presented evidence

concerning Aerojet's site investigation expenses. By then, Aerojet

had incurred such expenses in the amount of about

$26,655,787.01. In part, it had conducted its site investigation

against the private actions, which were ultimately about 38 in

number. By around 1986, it had resolved all, or at least almost all,

of these proceedings. After prevailing in a test case comprising

three such matters, it settled all, or almost all, of the outstanding

claims for about $450,000. In other part, it had conducted its site

investigation against the state's action under the Porter-Cologne

Water Quality Control Act, or more precisely, against various

administrative orders or requests that had been made antecedent

thereto. In yet other part, it had conducted its site investigation

against the consolidated federal and state CERCLA actions. In

1989, it had become subject to a partial consent decree entered

A-23

therein, which incorporated an agreement negotiated by the

parties. [***20] n6 Although it denied any and all liability, it

was required by the decree to "complete a Remedial

Investigation/Feasibility Study" or "RIES," which was subject to

oversight and review by the federal and state governments, in

order "to determine the nature and extent of public health and

environmental problems, if any, presented by the release or threat

of release of hazardous substances at or from [its Sacramento site]

and to develop and evaluate remedial alternatives so it can

subsequently be determined which, if any, is necessary to remedy

public health or environmental problems identified." n7 It

expressly admitted that it had incurred its site investigation

expenses, which it conceded included “costs . . . to investigate the

extent of the contamination or the viability of cleanup option [sic]

or the monitoring of the spread of waste from the site," "because

of government orders or requests to investigate, cleanup or

remediate" or "because of [its own] agreement or commitment to

perform the investigation, cleanup, or remediation . . . ." But it

also impliedly claimed that it had, or would have, incurred such

expenses in order to avoid or at least minimize (***21] liability.

In addition, it had assertedly incurred remediation expenses, more

broadly defined, in the amount of about $35,240,495.44 and, more

narrowly defined, in the amount of $30,454,495.44.

n6 A proposed consent decree, which incorporated an earlier

agreement, had been lodged with the federal and state

CERCLA complaints in 1986, and had subsequently been

withdrawn.

n7? In the words of section 300.430(a)(2), which was

subsequently added to title 40 of the Code of Federal

Regulations: "The purpose of the remedial

investigation/feasibility study (RVFS) is to assess site

conditions and evaluate alternatives to the extent necessary to

select a remedy. Developing and conducting an RI/FS

generally includes the following activities: project scoping,

data collection, risk assessment, treatability studies, and

wir ditlisantakicseliais inte sshd ate tise

at ae ote a

alae be nib &

acini ae oe 2k

A-24

analysis of alternatives." (55 Fed.Reg. 8666, 8846 (Mar. 8,

1990); accord, 40 C.F.R. § 300.430(a)(2) (1996).)

{[**917] After the presentation of evidence at phase III, the

superior court instructed [***22] the jury with language

virtually identical to that of the preinstruction quoted above.

[*53]

Following deliberations at phase III, the jury returned a

unanimous verdict determining that Aerojet's site investigation

expenses were not defense costs in any part.

Because the jury at phases II and III had determined that no sum

was Owing to Aerojet by the insurers, the superior court had no

need to, and did not, proceed to phase IV, at which it would have

resolved issues such as the allocation of any sum of this sort

among the insurers.

The superior court then rendered what it denominated its "final

judgment." Previously, it had entered various judgments and

orders related thereto. Subsequently, it would enter an order on

the taxing of costs.

Aerojet filed a notice of appeal from the final judgment. The

appeal was docketed in the Court of Appeal, First Appellate

District, under No. A057812, and was assigned to Division Five

thereof. Previously, Aerojet had filed a notice of appeal from the

various judgments and orders related to the final judgment. This

had been docketed in the First Appellate District under No.

A053808, and had been assigned to Division Five. Subsequently,

{***23] Aerojet would file a notice of appeal from the order on

the taxing of costs. This would be docketed in the First Appellate

District under No. A059976, and would be assigned to Division

Five.

In an opinion certified for partial publication, the Court of

Appeal, having effectively consolidated all three appeals for

A-25

consideration and decision, affirmed the "final judgment," the

various judgments and orders related thereto, and the order on the

taxing of costs, except as indicated below.

In part I of its discussion, which it did not certify for

publication, the Court of Appeal reviewed phase I of the trial.

Following Shell Oil Co. v. Winterthur Swiss Ins. Co. (1 993) 12

Cal. App. 4th 715, 743-748 [15 Cal. Rptr. 2d 815], which it

deemed to have been approved on this point in Montrose

Chemical Corp. v. Superior Court (1 993) 6 Cal. 4th 287, 304-305

[24 Cal. Rptr. 2d 467. 861 P.2d 1153], it concluded, inter alia,

that the superior court erred in its determination, based on City of

Carter Lake v. Aetna Cas. and Sur., supra, 604 F.2d 1052, that the

phrase "neither expected nor intended,” which it held to be

express in the insuring clause of some of Aerojet's comprehensive

[***24] general liability insurance policies and similar

instruments and implied in the insuring clause of the rest,

incorporated an objective standard as to "expectation," rather than

a subjective one.

In part II of its discussion, which it also did not certify for

publication, the Court of Appeal reviewed phase II of the trial. In

conformity with its holding (*54] that the phrase "neither

expected nor intended" incorporated a subjective standard as to

"expectation," it concluded, inter alia, that the superior court erred

by instructing the jury to the effect that "Aerojet has no insurance

coverage if" it "expected" specified harm, and that it "expected"

such harm if it "knew or should have known that there was a

substantial probability that certain consequences would result

from [its] acts or omissions.” (Italics added.) But applying the

harmless error rule of section 13 of article VI of the California

Constitution, as construed in Soule v. General Motors Corp.

(1994) 8 Cal. 4th 548, 573-581 [34 Cal. Rptr. 2d 607, 882 P.2d

298], it concluded that the superior court did not prejudice

Aerojet. In substance, it determined: The issue whether Aerojet

"expected" (***25] that it would cause pollution at and around

its Sacramento site focused on whether it "knew," from the very

A-26

commencement of its operations, that "there was a substantial

probability" that adverse consequences would result from its acts

or omissions; that Aerojet did in fact possess knowledge of this

sort was supported by "overwhelming" evidence.

In part III of its discussion, which alone it certified for

publication, the Court of Appeal reviewed phase III of the trial.

Specifically, in part III, the Court of Appeal concluded, inter

alia, that the superior court erred by instructing the jury to the

effect that Aerojet's site investigation expenses were not defense

costs to the extent that they were linked to orders or requests by

the United States or the State of California. It held in substance as

follows: Generally, site investigation expenses by an insured are -

defense costs to the extent that they are reasonable and necessary

to avoid [**918] or at least minimize liability; AJU Ins. Co. v.

Superior Court (1990) 51 Cal. 3d 807, 818-843 [274 Cal. Rptr.

820, 799 P.2d 1253] is not to the contrary, standing as it does only

for the proposition that certain site investigation [***26]

expenses by a third party--such as those included within "response

costs". by the United States under CERCLA--may be

indemnification costs to the extent that they must be reimbursed

by the insured and resolve liability for specified harm;

nevertheless, under the approach of the United States District

Court in Fireman's Fund Ins. Companies v. Ex-Cell-O Corp.

(E.D.Mich, 1992) 790 F. Supp. 1318, 1338 (hereafter sometimes

Ex-Cell-O I), and Fireman's Fund Ins. Companies v. Ex-Cell-O

Corp. (E.D.Mich. 1992) 790 F. Supp. 1339, 1346 (hereafter

sometimes Ex-Cell-O II), there is a presumption that an insured's

site investigation expenses in connection with a Remedial

Investigation/Feasibility Study or RI/FS responding to an order or

request by the United States for specific information under

CERCLA are not defense costs, but that presumption may be

rebutted by the insured by showing that the site investigation

expenses in question were reasonable and necessary to avoid or at

least minimize liability and [*55] would have been incurred

even in the absence of such order or request; the general rule

A-27

applies to Aerojet's site investigation expenses against (1) the

private actions, [***27] (2) the state's action under the Porter-

Cologne Water Quality Control Act and the various

administrative orders or requests antecedent thereto, which were

determined not to have sought site investigation, and (3) as

qualified below, against the federal and state CERCLA actions;

the exception applies to Aerojet's site investigation expenses in

connection with the Remedial Investigation/Feasibility Study

responding to any order or request by the federal or apparently the

state government for specific information under CERCLA.

Applying the harmless error rule, it concluded that the superior

court did indeed prejudice Aerojet: The erroneous instruction,

which was given at the commencement of this phase as well as at

its conclusion, effectively prevented Aerojet from presenting

available evidence that had a tendency in reason to prove that its

site investigation expenses were reasonable and necessary to

avoid or at least minimize liability; moreover, it provided the jury

with the wrong law to apply to such evidence as Aerojet and the

insurers had in fact presented.

In part III, the Court of Appeal also concluded that the superior

court did not err in ruling that defense costs could be [***28]

allocated to the insured. It held to this effect: because Aerojet

agreed that it would pay its own defense costs under the

"fronting" comprehensive general liability insurance policies

issued by INA from 1976 to 1984, it "should now carry [its] fair

share of the burden" pro rata based on the time of noninsurance

within the time as a whole.

The Court of Appeal denied a petition for rehearing by Aerojet.

On its own motion, it modified part II of its opinion, which was

unpublished, simply to add a single sentence at the very end in

order to “note the obvious--that [its] decision in [this part] is

based on the specific facts of this case." (Italics in original.)

On separate petitions by Aerojet and the insurers, we granted

review. Pursuant to rule 29.2(b) of the California Rules of Court,

adeia'tn ibe tila Kivi ileal alls

Sa ea ia DOS ANS Ri Mir a Ber MY

A-28

we subsequently specified the issues to be argued as indicated in

the introduction. .

The issues to be resolved are whether, under standard

comprehensive or commercial general liability insurance policies,

site investigation expenses may constitute defense costs that the

insurer must incur in fulfilling its duty to defend, and whether,

under such policies, defense costs [***29] may be allocated

[*56] to the insured. We shall first speak generally about the

policies in question and then tum to address each of the questions

in tum. n8

n8 The County of San Bernardino et al., which have been

granted leave to appear as amici curiae supporting Aerojet's

position, have submitted a request for judicial notice of the

following commentaries: (1) Elliott, The New Comprehensive

General Liability Policy (American Management Association

Reprint 1966); and (2) Obnst, The New Comprehensive

General Liability Insurance Policy--A Coverage Analysis

(Defense Research Inst. Monograph 1966). We deny the

request. We may take judicial notice only of matter that is

“authorized or required by law." (Evid. Code, § 450.) The

indicated commentaries are not such. (See id., § 451, 452.)

They may nevertheless be consulted for whatever assistance

they may furnish. So they were in the past, in decisions

including Montrose Chemical Corp. v. Admiral Ins. Co. (1995)

10 Cal. 4th 645, 671-672 [42 Cal. Rptr. 2d 324, 913 P.2d

878]. So they will be now as well.

[***30]

[**919] A

Standard comprehensive or commercial general liability

insurance policies are contracts between an insurer and an

. A-29

insured: In each, the insurer makes promises, and the insured pays

premiums, the one in consideration for the other, against the risk

of loss. (E.g., Buss v. Superior Court (1997) 16 Cal. 4th 35, 44-45

[65 Cal. Rptr. 2d 366, 939 P.2d 766].)

In pertinent part, standard comprehensive or commercial

general liability insurance policies provide that the insurer has a

duty to indemnify the insured for those sums that the insured

becomes legally obligated to pay as damages for a covered claim.

(E.g., Buss v. Superior Court, supra, 16 Cal. 4th at p. 45.) By

definition, this duty entails the payment of money (e.g., id. at p.

46), which is expressly limited in amount (see Croskey et al., Cal.

Practice Guide: Insurance Litigation 2, supra, P 7:354, p. 7A-76),

in order to resolve liability (e.g., Buss v. Superior Court, supra, 16

Cal. 4th at p. 46). It is not narrowly confined to money that the

insured must give under law as compensation to third parties, but

may also include money that the insured must itself expend in

equity in order [***31] to provide relief of the same sort. ( AIU

Ins. Co. v. Superior Court, supra, 51 Cal. 3d at pp. 818-843.) It

runs to claims that are actually covered, in light of the facts

proved. (E.g., Buss v. Superior Court, supra, 16 Cal. 4th at pp.

45-46.) It arises only after liability is established and as a result

thereof. (E.g., id. at p. 46; see Montrose Chemical Corp. v.

Admiral Ins. Co., supra, 10 Cal. 4th at p. 659, fn. 9.) It is

triggered if specified harm is caused by an included occurrence,

n9 so long as at least some such harm results within the policy

period. (Montrose Chemical Corp. v. Admiral Ins. Co., supra, 10

Cal. 4th at pp. 669-673.) It extends to all [*57] specified harm

caused by an included occurrence, even if some such harm results

beyond the policy period. (See id. at p. 686.) In other words, if

specified harm is caused by an included occurrence and results, at

least in part, within the policy period, it perdures to all points of

time at which some such harm results thereafter. nl0 [**920]

To illustrate by a hypothetical similar to the present case: Insurer

has a duty to indemnify insured for those sums that Insured

[***32] becomes legally obligated to pay as damages for

property damage caused by its discharge of hazardous substances,

A-30

up to a limit of $1 million. Insured discharges such a substance. It

thereby causes property damage to Neighbor's land, in the amount

of $100,000 (determined by the cost of returning the soil to its

original condition), within the policy period of year |. It causes

further damage of this sort as the substance spreads under the

surface, in the amount of $100,000 annually, in year two through

year thirty. Insured must pay Neighbor $3 million in damages

under judgment. Insurer must pay Insured the limit of $1 million

for indemnification.

5p BEL hace IBA RE AR WCE?

n9 As stated, prior to 1966, in its insuring clause the standard

comprehensive general liability insurance policy covered

specified harm, such as bodily injury or property damage,

caused by "accident" rather than by an "occurrence." (Croskey

et al., Cal. Practice Guide: Insurance Litigation 2, supra, P

7:26, p. 7A-8.) As pertinent here, the difference in words does

not reflect any difference in substance. (See id., PP 7:25 to

7:32, pp. 7A-8 to 7A-10.)

ome

nl0 In Montrose Chemical Corp. v. Admiral Ins. Co., supra,

10 Cal. 4th 645, we made the point plain. Hence, the contrary

premise on which Justice Chin rests his concurring and

dissenting opinion collapses as without support. In Montrose,

we noted, and reaffirmed, the "settled rule" of the case law that

"an insurer on the risk when continuous or progressively

: deteriorating [property] damage or [bodily] injury first

i manifests itself remains obligated to indemnify the insured for

the entirety of the ensuing damage or injury." ( /d. at p. 686,

: italics added.) In Armstrong World Industries, Inc. v. Aetna

Casualty & Surety Co. (1996) 45 Cal. App. 4th 1 [52 Cal.

Rptr. 2d 690], the Court of Appeal observed that, in Montrose,

3 we "relied upon existing case law holding that coverage for a

manifested loss is not terminated by the expiration of the

policy; coverage continues until the damage is complete." ( /d.

at p. 50.) Citing such case law itself, it explained: "[T]he event

A-31

which triggers an insurance policy's coverage does not define

the extent of the coverage. Although a policy is tnggered only

if [bodily injury or] property damage takes place ‘during the

policy period,' once a policy is triggered, the policy obligates

the insurer to pay ‘all sums’ which the insured shall become

liable to pay as damages for bodily injury or property damage.

The insurer is responsible for the full extent of the insured's

liability . . ., not just for the part of the [injury or] damage that

occurred during the policy period." (Id. at p. 105.) In light of

the foregoing, commentators have soundly stated: "Courts

reject the argument that [an] insurer should only be

responsible for [injury or] damage that took place during its

policy period . . . ." (Croskey et al., Cal. Practice Guide:

Insurance Litigation 2, supra, P 8:73.10, p. 8-19, italics in

original.)

In Montrose, we also made plain that "successive" insurers

"on the risk when continuous or progressively deteriorating

[property] damage or [bodily] injury first manifests itself" are

separately and independently "obligated to indemnify the

insured": "{W]here successive . . . policies have been

purchased, bodily injury and property damage that is

continuing or progressively deteriorating throughout more than -

one policy period is potentially covered by all policies in

effect during those periods." ( Montrose Chemical Corp. v.

Admiral Ins. Co., supra, 10 Cal. 4th at pp. 686-687.) The

successive insurers are not "jointly and severally liable." ( /d.

at p. 681, fn. 19, italics omitted.) Rather, "{a]llocation of the

cost of indemnification" among such insurers "requires

application of principles of contract law to the express terms

and limitations of the various policies" (ibid.) and, in their

absence, "equitable considerations" ( id. at p. 687).

[***34]

Standard comprehensive or commercial general liability

insurance policies also provide that the insurer has a duty to

Bien tin Re eee Ua Naar nts ee On ta RENE Bete Ree

A-32

defend the insured in any [*58] action brought against the

insured seeking damages for a covered claim. (E.g., Buss v.

Superior Court, supra, 16 Cal. 4th at p. 45.) By definition, the

duty entails the rendering of a service, viz., the mounting and

funding of a defense (e.g., id. at p. 46), which is not limited,

expressly or otherwise (see Travelers Ins. Co. v. Lesher (1986)

187 Cal. App. 3d 169, 191 [231 Cal. Rptr. 791], disapproved on

other points, Buss v. Superior Court, supra, 16 Cal. 4th at pp. 50,

fn. 12, & 52, fn. 14; cf. Croskey et al., Cal. Practice Guide:

Insurance Litigation 2, supra, P 7:647, p. 7B-32 [speaking

generally and without specific reference to such policies]), in

order to avoid or at least mw:imize liability (see Gray v. Zurich

Insurance Co. (1966) 65 Cal. 2d 263, 279 [54 Cal. Rptr. 104, 419

P.2d 168]). As such, it requires the undertaking of reasonable and

necessary efforts for that purpose (see ibid.), including

investigation (see Pacific Indem. Co. v. Universal etc. Ins. Co.

(1965) 232 Cal. [***35] App. 2d 541, 543-544 [43 Cal. Rptr.

26]). It also requires the incurring of reasonable and necessary

costs to that end (see Travelers Ins. Co. v. Lesher, supra, 187 Cal.

App. 3d at p. 191), including investigative expenses (see Pacific

Indem. Co. ». Universal etc. Ins. Co., supra, 232 Cal. App. 2d at

pp. 543-544). It runs to claims that are merely potentially covered,

in light of facts alleged or otherwise disclosed. (E.g., Buss v.

Superior Court, supra, 16 Cal. 4th at p. 46.) It arises as soon as

tender is made (e.g., ibid.), before liability is established and apart

therefrom (e.g., Montrose Chemical Corp. v. Admiral Ins. Co..

supra, 10 Cal. 4th at p. 659, fn. 9). It is discharged when the

action is concluded. (E.g., Buss v. Superior Court, supra, 16 Call.

4th at p. 46.) It may be extinguished earlier, if it is shown that no

claim can in fact be covered. (E.g., ibid.) If it is so extinguished,

however, it is extinguished only prospectively and not

retroactively: Before, the insurer had a duty to defend; after, it

does not have a duty to defend further. (E.g., ibid.) It is triggered

if specified harm may possibly have [***36] been caused by an

included occurrence, so long as at least some such harm may

possibly have resulted within the policy period. (Cf. Montrose

Chemical Corp. v. Admiral Ins. Co., supra, 10 Cal. 4th at pp. 669-

A-33

673 {holding to such effect as to the duty to indemnify].) It

extends to all specified harm that may possibly have been caused

by an included occurrence, even if some such harm may possibly

have resulted beyond the policy period. (Cf. id. at p. 686 (holding

to such effect as to the duty to indemnify].) In other words, if

specified harm may possibly have been caused by an included

occurrence and may possibly (**921] have resulted, at least in

part, within the policy period, it perdures to all points of time at

which some such harm may possibly have resulted thereafter. nll

To illustrate again by a hypothetical: Insurer has a duty to defend

Insured as to a claim for damages for property damage caused by

its discharge of hazardous substances brought by Neighbor.

Insured may possibly have discharged such a substance. It thereby

may possibly have caused property damage to [*59] Neighbor's

land within the policy period of year one. It may possibly have

caused [***37] further damage as the substance may possibly

have spread under the surface in year two through year thirty.

Insurer must defend Insured as to the claim in its entirety.

nll See footnote 10, ante.

It is plain that the insurer's duty to defend is broader than its

duty to indemnify. (E.g., Buss v. Superior Court, supra, 16 Cal.

4th at p. 46.) But it is also plain that it is not unlimited. (E.g.,

ibid.) It extends beyond claims that are actually covered to those

that are merely potentially so, but no further. (E.g., ibid.)

Thus. in an action wherein all the claims are at least potentially

covered because they may possibly embrace some triggering harm

of the specified sort within the policy period caused by an

included occurrence, the insurer has a duty to defend. ( Buss v.

Superior Court, supra, 16 Cal. 4th at pp. 46-47.) “This obligation

is express in the policy's language. It rests on the fact that the

insurer has been paid premiums by the insured for a defense. ‘The

rule is grounded [***38] in basic principles of contract law.’

(Citation.] The duty to defend is contractual. [Citations.} ‘An

A-34

insurer contracts to pay the entire cost of defending . . . claim[s]'

that are at least potentially covered." ( /d. at p. 47.)

By contrast, in an action wherein none of the claims is even

potentially covered because it does not even possibly embrace any

triggering harm of the specified sort within the policy period

caused by an included occurrence, the insurer does not have a

duty to defend. ( Buss v. Superior Court, supra, 16 Cal. 4th at p.

47.) "This freedom is implied in the policy's language. It rests on

the fact that the insurer has not been paid premiums by the insured

for a defense. This ‘rule' too 'is grounded in basic principles of

contract law.' [Citation.] As stated, the duty to defend is

contractual. 'The insurer has not contracted to pay defense costs'

for claims that are not even potentially covered." (Ibid.)

It follows that, in a "mixed" action, in which at least one of the

claims is at least potentially covered and at least one of the claims

is not, the insurer does not have a duty to defend the action in its

entirety arising out of contract (***39] : It "has a duty to defend

as to the claim[] that [is] at least potentially covered, having been

paid premiums by the insured therefor, but does not have a duty to

defend as to [the claim] that [is] not, having not been paid

therefor." ( Buss v. Superior Court, supra, 16 Cal. 4th at pp. 47-

48)

Nevertheless, the insurer has a duty to defend the entire "mixed"

action imposed by law in support of the policy: "To defend

meaningfully, [it] must [*60] defend immediately. [Citation.] To

defend immediately, it must defend entirely." ( Buss v. Superior

Court, supra, 16 Cal. 4th at pp. 48-49.)

It is manifest that this analysis applies, as it were, not only

between claims but also between parts of a single claim. n12

nl2 Pace Justice Kennard, who in her concurring and

dissenting opinion essentially adheres to views that we

previously considered and found wanting. (Compare Buss v.

A-35

Superior Court, supra, 16 Cal. 4th at pp. 44-49 with id. at pp.

2-66 (dis. opn. of Kennard, J.).)

[ S40)

Thus, when all the parts of a claim are at least potentially

covered because each may possibly embrace some triggering

harm of the specified sort within the policy period caused by an

included occurrence, the insurer has a duty to defend. It has "

‘contract[ed] to pay the entire cost of defending' " a claim of this

sort. ( Buss v. Superior Court, supra, 16 Cal. 4th at p. 47.)

[**922] By contrast, when none of the parts of a claim is even

potentially covered because it does not even possibly embrace any

triggering harm of the specified sort within the policy period

caused by an included occurrence, the insurer does not have a

duty to defend. It " ‘has not contracted to pay defense costs'" for a

claim of this sort. ( Buss v. Superior Court, supra, 16 Cal. 4th at

p. 47.)

It follows that, as to a "mixed" claim, in which at least one_of

the parts is at least potentially covered and at least one of the parts

is not, the insurer does not have a contractual duty to defend the

claim in its entirety.

Nevertheless, the insurer has a prophylactic duty to defend the

entire "mixed" claim. That is because to defend meaningfully, it

must defend immediately, and [***41] to defend immediately, it

must defend entirely.

The first issue on review concerns whether, under standard

comprehensive or commercial general liability insurance policies,

site investigation expenses may constitute defense costs that the

insurer must incur in fulfilling its duty to defend.

A-36

The insurer has a duty to defend. In fulfilling its duty, it must

undertake reasonable and necessary efforts to avoid or at least

minimize liability. To that end, it must incur reasonable and

necessary costs. All this it must do from as early as tender of the

defense through as late as conclusion of the action.

It follows that the insured's site investigation expenses

constitute defense costs that the insurer must incur in fulfilling its

duty to defend if, [*61] and only if, the following requirements

are satisfied. First, the site investigation must be conducted within

the temporal limits of the insurer's duty to defend, i.e., between

tender of the defense and conclusion of the action. Second, the

site investigation must amount to a reasonable and necessary

effort to avoid or at least minimize liability. Third and final, the

site investigation expenses must be reasonable and necessary

[***42] for that purpose.

Thus, if and to the extent that the insured's site investigation is

conducted within the temporal limits of the insurer's duty to

defend and amounts to a reasonable and necessary effort to avoid

or at least minimize liability, the related site investigation

expenses may possibly be defense costs that the insurer must

incur in fulfilling its duty to defend. If and to the extent that these

site investigation expenses ar. reasonable and necessary for that

purpose, they are in fact defense costs that the insurer must incur

in fulfilling its duty to defend; but if and to the extent that they are

not, they are not. By contrast, if and to the extent that the site

investigation is not conducted within the temporal limits of the

insurer's duty to defend or does not amount to a reasonable and

necessary effort to avoid or at least minimize liability, the related

site investigation expenses cannot even possibly be defense costs

that the insurer must incur in fulfilling its duty to defend.

Not to the contrary is A/JU Ins. Co. v. Superior Court, supra, 51

Cal. 3d 807. As pertinent here, that decision stands only for the

proposition that certain site investigation [***43] expenses by a

third party--such as those included within "response costs" by the

A 37

United States under CERCLA--may be indemnification costs to

the extent that they must be reimbursed by the insured and resolve

liability for specified harm. ( /d. at pp. 824-843.) It simply does

not hold or state that such expenses by an insured are not defense

costs to the extent that they are reasonable and necessary to avoid

or at least minimize liability. n13 In AIU [**923] _ Ins. Co. v.

Superior Court, we construed standard policy language covering

indemnification costs, i.e. “sums which [the insured] becomes

‘legally obligated’ to pay as ‘damages’ . . . because of '[bodily

injury or] property damage.’ " ( /d /*62] at p. 824.) We

concluded that the phrase “legally obligated" means required of

the insured, whether at law or in equity. ( /d. at pp. 824-825.) We

further concluded that the term “damages" comprehends the

insured's costs of providing the relief required, whether such costs

are paid by the insured itself or reimbursed by tt to a third party. (

Id at pp. 825-842.) We then concluded that the phrase "property

damage" refers to specified harm that the insured [***44] has

caused. ( Jd. at pp. 842-843.) It is manifest that site investigation

expenses by the insured may not be indemnification costs, L.e.,

"sums which [the insured] becomes ‘legally obligated’ to pay as

‘damages’ . . . because of ‘[bodily injury or] property damage.’ "

For example, such expenses may be required of the insured under

CERCLA even betore it has been proved to have caused specified

harm (see, e.g. 42 USC. § 9604a\(1) [reaching "potentially

responsible part{ies]" (italics added)]})--and even if it is

subsequently proved not to have done so (see American Bumper v.

Hartford Ins. (1996) 452 Mich. 440, 443-447, 460-463 [550

N.W 2d 475, 477-479, 485-486]).

nl3 At least as a general matter, under the analysis presented

in the text, the costs that the insurer must incur in fulfilling its

duty to indemnify and the costs that it must incur in fulfilling

its duty to defend are mutually exclusive. Indemnification

costs, i.e., expenses to resolve liability, are expressly limited in

the policy. They arise after the insured's liability is established

and as a result thereof. That is because indemnification

presupposes that such liability has actually been established in

Meet eat Saar Vine ch Ud ae a a

A-38

the past. (See Montrose Chemical Corp. v. Admiral Ins. Co.,

supra, 10 Cal. 4th at p. 659, jn. 9.) By contrast, defense costs,

i.e., expenses to avoid or at least minimize liability, are not

limited by the policy, expressly or otherwise, but impliedly

extend to all such expenses as are reasonable and necessary.

They arise before the insured's liability is established and apart

therefrom. That is because defense presupposes that such

liability may possibly be established in the future. (See ibid.)

Thus, at least generally, the same costs cannot be both

indemnification costs and defense costs.

eee

Whether the insured's site investigation expenses are defense

costs that the insurer must incur in fulfilling its duty to defend

must be determined objectively, and not subjectively from the

viewpoint of either the insurer or the insured.

Specifically, whether the site investigation is conducted by the

insured within the temporal limits of the insurer's duty to defend

must be assessed under an objective standard. What matters is

whether the site investigation actually occurs between tender of

the defense and conclusion of the action, not whether it is

honestly believed to occur.

Whether the insured's site investigation amounts to a reasonable

and necessary effort to avoid or at least minimize liability must

also be assessed under an objective standard. What matters here is

whether the site investigation would be conducted against liability

by a reasonable insured under the same circumstances. Were it

not, the question would require a discernment of motive. Why is

the insured conducting the site investigation at issue? to resist

liability? for that reason and some other? for a reason altogether

different? "Motive, however, is ‘hard . . . to discern.' " ( Buss v.

Superior [***46] Court, supra, 16 Cal. 4th at p. 52, fn. 14,

quoting Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) 11

Cal. 4th 376, 405 [45 Cal. Rptr. 2d 436, 902 P.2d 740] (conc.

A-39

opn. of Mosk, J.).) "THAT IS TRUE... [AS TO] AN

INDIVIDUAL: a person's mind and heart typically reveal

themselves and conceal themselves at one and the same time. It is

truer still . . . [as to] a group of individuals: many minds and

hearts are then involved, and they cannot simply be added up.

And, of course, it is truest . . . [as to] a corporation or [*63]

similar entity"--like the typical commercial or governmental

insured: "the 'mind' and ‘heart’ of such a one is purely fictive." (

Della Penna v. Toyota Motor Sales, U.S.A., Inc., supra, 11 Cal.

4th at p. 405 (conc. opn. of Mosk, J.); accord, Buss v. Superior

Court, supra, 16 Cal. 4th at p. 52, fn. 14.)

Lastly, whether the insured's site investigation expenses are

reasonable and necessary to avoid or at least minimize liability

must be assessed under an objective standard as well. What

matters here is whether the site investigation expenses would be

incurred against liability by a reasonable insured under the same

circumstances. [***47] Were it not, this question too would

require a discernment of motive. Why is the insured incurring the

site investigation expenses at issue? to resist liability? for that

reason and some other? for a reason altogether different?

"Motive," again, "is ‘hard . . . to discern.’ " [**924] ( Buss v.

Superior Court, supra, 16 Cal. 4th at p. 52, fn. 14.)

All this is true even in the general context of a governmental

request or order for the insured to conduct a site investigation

and/or to incur site investigation expenses. Otherwise, the

questions whether the insured's site investigation is reasonable

and necessary to avoid or at least minimize liability and whether

its site investigation expenses are reasonable and necessary for

that purpose would require a difficult discernment of motive. Why

is the insured conducting the site investigation in question and

why is it incurring the site investigation expenses at issue? to

resist liability? to satisfy the government without regard to

consequences? for an altogether different reason? or, most

plausibly, both to resist liability and to satisfy the government?

A-40

All this is also true even in the specific context of an order

(***48] or request for a Remedial Investigation/Feasibility

Study or RI/FS under CERCLA by the United States. The federal

government may require or ask for such a study. (See 42 U.S.C. §

9604(a)(1).) It may conduct the study itself. (See ibid.) If it does,

it may compel the insured to reimburse it for the cost thereof. (42

U.S.C. § 9607(a).) The insured may be allowed to conduct the

study if it is determined to be qualified to do so, if it is subjected

to federal government oversight and review, and if it agrees to

make reimbursement for the cost of such oversight and review.

(42 U.S.C. § 9604(a)(1).) It is well known that, by conducting the

study itself, the insured may be able to avoid or at least minimize

liability--both for the costs of the study and for any costs

subsequent thereto (see, e.g., Aetna Cas. and Sur. Co., Inc. v.

Fintlar Corp. (9th Cir. 1991) 948 F.2d 1507, 1517; see also AIU

Ins. Co. v. Superior Court, supra, 51 Cal. 3d at p. 837 [stating

that, "[a]s courts and commentators have recognized, government

cleanup efforts [under CERCLA] are generally considerably more

expensive than cleanups performed by" the insured]). [*64]

Here too, although the [***49] insured's motives may be hard to

discern, they are most plausibly both to resist liability and to

satisfy the government.

Finally, on the question whether the insured's site investigation

expenses are defense costs that the insurer must incur in fulfilling

its duty to defend, there arises the issue of the burden of proof.

In the general case, it is the insured that must carry the burden

of proof on the existence, amount, and reasonableness and

necessity of the site investigation expenses as defense costs, and it

must do so by the preponderance of the evidence. "Evidence Code

section 500 provides that, generally, a party desiring relief must

carry the burden of proof thereon." (Buss v. Superior Court,

supra, 16 Cal. 4th at p. 53.) Further, "Evidence Code section 115 .

. . provides that the burden of proof that is generally applicable is

proof by a preponderance of the evidence. Of course, this burden

is the ‘ordinary’ one for civil actions. [Citations.] It is applicable to

A-41

contractual causes of action." ( Buss v. Superior Court, supra, 16

Cal. 4th at pp. 53-54.)

By contrast, in the exceptional case, wherein the insurer has

breached its duty to defend, [***50] it is the insured that must

carry the burden of proof on the existence and amount of the site

investigation expenses, which are then presumed to be reasonable

and necessary as defense costs, and it is the insurer that must

carry the burden of proof that they are in fact unreasonable or

unnecessary. (Accord, Fireman's Fund Ins. Companies v. Ex-Cell-

O Corp. (Ex-Cell-O II), supra, 790 F. Supp. at p. 1346 [semble,

but apparently intermingling the presumption affecting the burden

of proof and the presumption affecting the burden of producing

evidence]; cf. /saacson v. California Ins. Guarantee Assn. (1988)

44 Cal. 3d 775, 791 [244 Cal. Rptr. 655, 750 P.2d 297]

(concluding that, "if an insurer wrongfully fails to provide ...a

defense, and the insured then settles the claim, . . . [iJn a later

action against the insurer for reimbursement" "the insured is given

the benefit of an evidentiary presumption," later expressly held to

affect the burden of proof ( Xebec Development Partners, Ltd. v.

National Union Fire Ins. Co. (1993) 12 Cal. App. 4th 501, 549

/15 Cal. Rptr. 2d 726]) that the insured was indeed liable on, and

in the amount of, the settled claim, [***51] so long as the

settlement was reasonable].) As is ordinary [**925] _ in civil

actions generally and for contractual claims in particular, the

insurer and the insured must each carry its burden of proof by a

preponderance of the evidence.

It follows that Aerojet's site investigation expenses may

constitute defense costs that the insurers must incur in fulfilling

their duty to defend. From 1956 to about 1975, Aerojet had

largely typical comprehensive general liability insurance policies

and similar instruments, covering specified harm [*65]

including bodily injury and/or property damage, that were issued

by various insurers. From 1976 to 1984, it had "fronting" policies

of this sort that were issued by INA. The record on appeal shows

that Aerojet's site investigation may have been conducted within

ee T

A-42

the temporal limits of each insurer's duty to defend. It also shows

that the site investigation, at least in part, may have amounted to a

reasonable and necessary effort to avoid or at least. minimize

liability. It finally shows that the site investigation expenses, at

least in part, may have been reasonable and necessary for that

purpose. Whether and to what extent they actually [***52] were

such are issues to be resolved on retrial.

The insurers argue against the foregoing conclusion. They fail to

persuade.

For example, the insurers imply that site investigation and site

investigation expenses are peculiar to hazardous substance

discharge claims. That may be true. But it does not mean, as they

apparently suppose, that site investigation cannot amount to a

reasonable and necessary effort to avoid or at least minimize

liability or that site investigation expenses cannot be reasonable

and necessary for that purpose. Factually, a hazardous substance

discharge claim may be sui generis. Legally, however, it is not

unique. The insurers maintain that the governmental actions were

different from others: They were not litigated, they did not seek a

judgment; rather, they were negotiated, they aimed at settlement.

The governmental actions may have been unlike others in degree.

But not in kind. Many actions involve negotiation rather than

litigation; many look toward settlement rather than judgment.

What matters is the legal "essence," as it were, of any site

investigation and any site investigation expenses, and not their

factual "accidents."

In addition, the insurers [***53] assert that the insured will

have carte blanche to pronounce any "site investigation expenses"

to be defense costs, provided only that the insured entertains an

honest belief--or persuasively says it entertains an honest belief--

that they are. Not so. The standard is objective, not subjective.

Further, the insurers imply that site investigation expenses may

be included within "response costs" under CERCLA. That may be

A-43

true. But it does not mean, as they apparently suppose, that site

investigation expenses cannot be defense costs. For instance, the

insured's site investigation expenses for identifying the hazardous

substance discharged may be "response costs" insofar as they

promote removal and remediation, by enabling it to determine

how to neutralize the substance in question. They may also be

defense costs insofar as they are reasonable and necessary to

avoid or at least minimize liability, by making it possible for it to

show that it was not in fact [*66] the source of the discharge.

Any assumption that site investigation expenses cannot do double

duty is unsupported and hence must be rejected. So too any

similar assumption about the site investigation itself. [***54] If

site investigation expenses must be incurred by the insurer in

fulfilling its duty to defend the insured, they must be incurred.

The insurer gives, and the insured gets, what they bargained for.

Even if the insured may happen to derive some added benefit, the

insurer does not shoulder any added burden. The insurer may not

be heard to complain. (Cf. Domtar, Inc. v. Niagara Fire Ins. Co.

(Minn. 1997) 563 N.W.2d 724, 738-739 [applying Minnesota law,

but speaking generally: That the same costs may do double duty

as both indemnification costs and defense costs does not mean

that they do not do duty as the latter as well as the former].) nl4

nl4 In General Acc. Ins. Co. v. State Dept. of Environ. (1996)

143 NJ. 462, 473-479 [672 A.2d 1154, 1160-1163], in which

it applied New Jersey law, but spoke generally, the New Jersey

Supreme Court implied to the contrary. It evidently did so

because it did not follow a _ contractual/quasi-contractual

analysis such as that set out in the text, but rather strayed--

erroneously, in our view--in the direction of vague "fairness"

and rough "justice." (See also pp. 73-76, post.)

‘eee

[**926] Also, the insurers assume that site investigation

expenses cannot be defense costs to the extent that the underlying

site investigation is ordered or requested by the federal or state

oo Rn eT Sa SO

A-44

government or, it seems, by any other person or entity. Their

premise is, apparently, that the effort undertaken by a party in

defending itself must be voluntary, as for example initiated and

controlled by the party itself. It is unsound. (See Hi-Mill Mfg. Co.

v. Aetna Cas. & Sur. Co. (E.D.Mich. 1995) 884 F. Supp. 1109,

1116-1117 [applying Michigan law, but speaking generally];

American Bumper v. Hartford Ins, supra, 452 Mich. at pp. 460-

463 [550 N.W.2d at pp. 485-486 [same]; General Acc. Ins. Co. v.

State Dept. of Environ., supra, 143 N.J. at p. 476 [672 A.2d at pp.

1161-1162] {applying New Jersey law, but speaking generally].)

What matters is what is done, not why. All the same: Typically,

the effort undertaken by a defendant in responding to a plaintiff's

interrogatories is not voluntary in any real sense: It is initiated at

the plaintiff's request and is controlled by the plaintiff's threat of

a motion to compel further responses. But, typically, the expenses

[***56] of responding to interrogatories may indeed be defense

costs. The result is unaffected by the fact that a partial consent

decree was entered in the consolidated ‘ederal and state CERCLA

actions, under which Aerojet was required to "complete a

Remedial Investigation/Feasibility Study" or "RI/FS," which was

subject to oversight and review by the federal and state

governments. (See American Bumper v. Hartford Ins, supra, 452

Mich. at pp. 460-463 [550 N.W.2d at pp. 485-486] [applying

Michigan law, but speaking generally].) "To be sure, consent

decrees bear some of the earmarks of judgments entered after

litigation. At the same time, because their terms are arrived at

through [*67] mutual agreement of the parties, consent decrees

also closely resemble contracts." ( Firefighters v. Cleveland

(1986) 478 U.S. 501, 519 [106 S. Ct. 3063, 3073, 92 L. Ed. 2d

405].) Their "most fundamental characteristic," however, is their

"voluntary nature." ( Jd. at pp. 521-522 [106 S. Ct. at p. 3075].)

"Indeed, it is the parties' agreement that serves as the source of the

court's authority to enter any judgment at all." ( /d. at p. 522 [106

S. Ct. at p. 3075].) "More importantly, [***57] _ it is the

agreement of the parties, rather than the force of the law upon

which the complaint was originally based, that creates the

obligations embodied in a consent decree." (Ibid.) n15

A-45

n15 Insofar as the insurers’ assumption that site investigation

expenses cannot be defense costs to the extent that the

underlying site investigation is ordered or requested by the

federal or state government is based on the premise that such

expenses are indemnification costs within the meaning of A/U

Ins. Co. v. Superior Court, supra, 51 Cal. 3d at page 824, i.e.,

"sums which [the insured] becomes ‘legally obligated’ to pay

as ‘damages’ . . . because of ‘[bodily injury or] property

damage[,]' " it is unsound. There is a suggestion that a "legal

obligation" arises from a governmental order and perhaps even

from a governmental request. But any such "legal obligation"

need not be "to pay .. . 'damages' . . . because of ‘[bodily

injury or] property damage.' " For example, as indicated in the

text, a legal "obligation" may be imposed under CERCLA

even before specified harm is proved--and even if such harm is

subsequently disproved.

[***58]

Contrariwise, the insurers assume that site investigation

expenses cannot be defense costs to the extent that the underlying

site investigation is "agreed" or "committed" to by the insured.

Their premise is, apparently, that the effort undertaken by a party

in defending itself must be involuntary. It is unsound. As stated,

what matters is what is done, not why.

Next, the insurers assert that, if site investigation expenses may

constitute defenses costs, so may settlement costs--a result they

say is untenable. Again, not so. Site investigation expenses may

be defense costs because they may be reasonable and necessary to

avoid or at least minimize liability. Settlement costs cannot be

defense costs because, instead, they resolve liability.

Finally, the insurers imply that the standard for determining

whether the insured's site investigation expenses constitute

defense costs is not a "bright line" rule and hence will encourage

A-46

needless litigation. To our mind, the test is clear. It is certainly as

clear as the law allows. All must proceed as best they can.

[**927] By giving an affirmative answer to the question

whether site investigation expenses may constitute [***59]

defense costs that the insurer must incur in fulfilling its duty to

defend, the Court of Appeal did not err. Surely, it was right to

hold prejudicially erroneous the superior court's instruction to the

jury to the effect that Aerojet's site investigation expenses did not

constitute defense [*68] costs to the extent that they were

linked to orders or requests by the United States or the State of

California. In its absence, there was a "reasonable chance" (

College Hospital, Inc. v. Superior Court (1994) 8 Cal. 4th 704,

715 [34 Cal. Rptr. 2d 898, 882 P.2d 894], italics omitted) that the

jury would have found at least some of the site investigation

expenses--which amounted to $26,655,787.01--to be such. The

insurers' claim to the contrary notwithstanding, evidence in

support had been presented.

In answering the question of site investigation expenses as it

did, the Court of Appeal erred to the extent that it chose to adopt

the approach of the federal district court in Ex-Cell-O I (

Fireman's Fund Ins. Companies v. Ex-Cell-O Corp., supra, 790 F.

Supp. at p. 1338) and Ex-Cell-O II ( Fireman's Fund Ins.

Companies v. Ex-Cell-O Corp., supra, 790 F. Supp. [***60] at

p. 1346)--which is, in substance, that an insured's site

investigation expenses in connection with a Remedial

investigation/Feasibility Study or RI/FS responding to an order or

request by the United States for specific information under

CERCLA are presumed, albeit only rebuttably, not to be defense

costs. The federal district court did not present any reasoning, or

cite any authority, in support. None is apparent. We shall not

follow. nl6

nl6 In General Acc. Ins. Co. v. State Dept. of Environ., supra,

143 N.J. at page 477 [672 A.2d at page 1162], and Domtar,

Inc. v. Niagara Fire Ins. Co. (Minn.Ct.App. 1996) 552 N.W.2d

A-47

738, 751-752, affirmed in pertinent part, Domtar, Inc. v.

Niagara Fire Ins. Co., supra, 563 N.W.2d 724, the New Jersey

Supreme Court and the Minnesota Court of Appeals,

respectively, also adopted the approach of the federal district

court in Ex-Cell-O I and Ex-Cell-O II. Although each cited the

federal district court, neither presented any reasoning.

In Endicott Johnson Corp. v. Liberty Mut. Ins. Co. (N.D.N_Y.

1996) 928 F. Supp. 176, 184, appeal and cross-appeal

dismissed (2d Cir. 1997) 1/6 F.3d 53, the United States

District Court of the Northem District of New York hefd that it

would "allocate" Remedial Investigation/Feasibility Study or

RI/FS costs as follows: "To the extent that an expense is

primarily attributable to remedial investigations . . . the

expense will be treated as a defense cost. To the extent an

expense is primarily attributable to feasibility studies . . . the

expenses will be treated as damages to be indemnified.

Finally, to the extent the Court cannot determine . . . whether

an expense is attributable to either RI or FS, the Court will

have broad discretion to allocate the expense in an equitable

manner." (Fn. omitted.) The court thought its method was

"simple." (Ibid.) In light of the analysis presented in the text,

we think it is simplistic.

[***61]

The second issue on review concerns whether, under standard

comprehensive or commercial general liability insurance policies,

defense costs may be allocated to the insured.

The insurer has a duty arising out of the policy as a contract to

defend as to a claim, or a part of a claim, that is at least potentially

covered because it may possibly embrace some triggering harm of

the specified sort within the policy period caused by an included

occurrence. It has been held [*69] that, under principles of the

A-48

law of contract, the insurer may not obtain reimbursement from

the insured for defense costs that can be allocated to a claim that

is at least potentially covered: "With regard to defense costs" of

this sort, "the insurer has been paid premiums by the insured. It

bargained to bear these costs. To attempt to shift them would

upset the arrangement." ( Buss v. Superior Court, supra, 16 Cal.

4th at pp. 49-50.) Implicit in this holding is the proposition that

the insurer may not obtain reimbursement from the insured for

defense costs that can be allocated to a part of a claim that is at

least potentially covered. It follows that, pursuant to contract,

defense [***62] costs that can be allocated to a claim, or a part

of a claim, that is at least potentially covered cannot be allocated

to the insured.

By contrast, the insurer does not have a duty arising out of the

policy as a contract--but may have one imposed by law in support

thereof--to defend as to a claim, or a part of a claim, that is not

even potentially covered because it does not even possibly

[**928] embrace any triggering harm of the specified sort within

the policy period caused by an included occurrence. It has been

held that, under principles of the law of restitution, the insurer

may obtain reimbursement from the insured for defense costs that

can be allocated solely to a claim that is not even potentially

covered: "With regard to defense costs" of this sort, "the insurer

has not been paid premiums by the insured. It did not bargain to

bear these costs. To attempt to shift them would not upset the

arrangement. [Citation.] The insurer therefore has a right of

reimbursement that is implied in law as quasi-contractual .. . ." (

Buss v. Superior Court, supra, 16 Cal. 4th at pp. 50-51.) Implicit

in this holding is the proposition that the insurer may obtain

reimbursement [***63] from the insured for defense costs that

can be allocated solely to a part of a claim that is not even

potentially covered. It follows that, pursuant to quasi-contract,

defense costs that can be allocated solely to a claim, or a part of a

claim, that is not even potentially covered can be allocated to the

insured.

A-49

On the allocation of defenses costs to the insured, it is the

insurer that must carry the burden of proof, and it must do so by

the preponderance of the evidence. What we said above we say

here: "Evidence Code section 500 provides that, generally, a party

desiring relief must carry the burden of proof thereon," and

"Evidence Code section 115... provides that the burden of proof

that is generally applicable is proof by a preponderance of the

evidence.” ( Buss v. Superior Court, supra, 16 Cal. 4th at p. 53.)

We discern no reason to make an exception here.

In the case at bar, the record on appeal discloses this: From

1956 to about 1975, Aerojet had largely typical comprehensive

general liability insurance policies and similar instruments,

covering specified harm including bodily injury and/or property

damage, that were issued by various [*70] insurers. From

(***64] 1976 to 1984, it had "fronting" policies of this sort that

were issued by INA. With the exception of INA, as to which

Aerojet agreed to pay its own defense costs and indeed to defend

itself, nl7 the insurers each had a duty to defend all the

governmental and private actions in their entirety--to be precise,

each had such a duty separate and independent from the others (

Continental Cas. Co. v. Zurich Ins. Co. (1961) 57 Cal. 2d 27, 37

[17 Cal. Rptr. 12, 366 P.2d 455]). In each action, each insurer

was presented with what was in substance a single broad "mixed"

claim. That claim was predicated on facts, alleged or otherwise

disclosed, to the effect that, throughout the course of its

operations from the early 1950's into the 1980's, Aerojet

discharged hazardous substances in an ongoing fashion at its

Sacramento site and thereby caused pollution in and around that

location resulting in continuous and/or progressively deteriorating

bodily injury and/or property damage. That claim, therefore, was

at least potentially covered in part under each of the policies

pertinent here because it might possibly involve specified harm

caused by an included occurrence, n18 with [***65] triggering

harm of that sort within the policy period in question. Each

insurer was "on the risk" for at least one such period. None was on

the risk for all. Each, as stated, was presented with a "mixed"

A-50

CLAIM: At least one of the parts was at least potentially covered

because it might possibly embrace some triggering harm of the

specified sort within the policy period caused by an included

occurrence, and at least one of the parts was not even potentially

covered because it did not even possibly embrace any triggering

harm of the specified sort within the policy period caused by an

included occurrence. Nevertheless, each had a duty, prophylactic

although not contractual, to defend all the parts. n19 It is true that

INA had no duty to [**929] defend whatsoever. But that fact is

immaterial so far as the other insurers are concerned. The

"fronting" policies created rights and duties between Aerojet and

INA. They did not even purport to create any right or duty in

either Aerojet or INA as against the world, including the other

insurers. Nor could they. As contracts, they were effective only

between Aerojet and INA. ( Chandler v. Roach (1957) 156 Cal.

App. 2d 435, 444 [319 P.2d [***66] 776].)

n17 In stating that Aerojet agreed to pay its own defense costs

and indeed to defend itself, we merely follow the language of

the "fronting" policies. Of course, Aerojet did not "contract"

with itself to impose an "obligation" on itself.

n18 Or, similarly, by "accident," etc. (See fn. 9, ante.)

nl9 Each may also have had a corresponding right of some

sort to require the others to share in discharging the duty or at

least to contribute to its costs. (See generally, Croskey et al.,

Cal. Practice Guide: Insurance Litigation 2, supra, PP 8:73.10

to 8:73.19, pp. 8-17 to 8-22 [surveying the topic]; see also

Haskel, Inc. v. Superior Court (1995) 33 Cal. App. 4th 963,

976, fn. 9 [39 Cal. Rptr. 2d 520] {appearing to assume such a

right]; cf. Montrose Chemical Corp. v. Admiral Ins. Co.,

supra, 10 Cal. 4th at p. 687 [stating that, "leaving aside the

availability of excess (multiple) policies or ‘other insurance’

clauses, and absent express policy language decreeing the

manner of apportionment of contribution among successive

liability insurers, the courts will generally apply equitable

A-51

considerations to spread the cost [of indemnification] among

the several policies and insurers").)

[*e*67] (°71]

It follows that, if it carries the burden of proof by a

preponderance of the evidence, each insurer may allocate defense

costs to Aerojet for any part of the single broad "mixed" claim

presented in the governmental and private actions that was not

even potentially covered because it did not even possibly embrace

any triggering harm of the specified sort within its policy period

or periods caused by an included occurrence. For example, on the

requisite proof, it may allocate defense costs for a part involving

acts or omissions that may possibly have caused bodily injury or

property damage--whether continuous or progressively

deteriorating, on the one side, or discrete, on the other side--only

after its policy or policies expired. (Cf. Maples v. Aetna Cas. &

Surety Co. (1978) 83 Cal. App. 3d 641, 644-650 [148 Cal. Rptr.

80] {holding that there is no coverage under a comprehensive

general liability policy as to acts Or omissions that caused

specified harm of any kind only after the policy expired].) On

same proof, it may also allocate defense costs for a part involving

acts or omissions that may possibly have caused bodily injury or

property damage--specifically, discrete [***68] bodily injury or

property damage--only before its policy or policies incepted. (Cf.

Montrose Chemical Corp. v. Admiral Ins. Co., supra, 10 Cal. 4th

at p. 691 [implying that there is no coverage under a

comprehensive general liability policy as to acts or omissions that

caused spec

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.