Opinion ID: 1992368
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Heading: Damages within the meaning of CGL policies.

Text: The CGL policies obligate the defendants to pay all sums which the insured shall become legally obligated to pay as damages because of ... property damage. The defendants say this provision does not obligate them to pay all sums which the insured shall become legally obligated to pay. To the contrary, the defendants say they have agreed to indemnify the insured for all sums the insured is legally obligated to pay as damages. They argue that the term damages therefore limits the all sums provision in the policy. In the defendants' view, the term damages provides the key to their obligation to pay all sums imposed upon the insured by law due to property damage. The defendants want us to give the term damages the narrow, technical definition given to it by NEPACCO and Armco. Because the policies do not define damages, we are left with the task of interpreting its meaning. And, as the federal district court found, this interpretation question is one controlled by state law. See Erie R.R. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 822, 82 L.Ed. 1188, 1194, cert. denied, 305 U.S. 637, 59 S.Ct. 108, 83 L.Ed. 410, reh'g denied, 305 U.S. 673, 59 S.Ct. 229, 83 L.Ed. 436 (1938). The federal district court also found that Iowa law controls. None of the parties dispute this finding. Construction of an insurance policythe process of determining its legal effectis a question of law for the court. Interpretationthe process of determining the meaning of words usedis also a question of law for the court unless it depends on extrinsic evidence or a choice among reasonable inferences to be drawn. Farm Bureau Mut. Ins. Co. v. Sandbulte, 302 N.W.2d 104, 107-08 (Iowa 1981). Because there is no extrinsic factual record before us, the meaning of the term damages in the policies is for us to decide. In the construction of insurance policies, the cardinal principle is that the intent of the parties must control; and except in cases of ambiguity this is determined by what the policy itself says. Cairns v. Grinnell Mut. Reinsurance Co., 398 N.W.2d 821, 823 (Iowa 1987); Iowa R.App.P. 14(f)(14). Ambiguity exists if, after the application of pertinent rules of interpretation to the policy, a genuine uncertainty results as to which one of two or more meanings is the proper one. Fraternal Order of Eagles v. Illinois Cas. Co., 364 N.W.2d 218, 221 (Iowa 1985). Because insurance policies are in the nature of adhesive contracts, we construe their provisions in a light favorable to the insured. Cairns, 398 N.W.2d at 824. So an insurer should clearly and explicitly define any limitations or exclusions to coverage expressed by broad promises. Id. When words are left undefined in a policy we do not give them a technical meaning. Rather we give them their ordinary meaning, one which a reasonable person would understand them to mean. Farm & City Ins. Co. v. Potter, 330 N.W.2d 263, 265 (Iowa 1983). We do not give them the meaning only a specialist or expert would understand. City of Spencer v. Hawkeye Sec. Ins. Co., 216 N.W.2d 406, 408-09 (Iowa 1974). And if such words are susceptible to two interpretations, the interpretation favoring the insured is adopted. North Star Mut. Ins. Co. v. Holty, 402 N.W.2d 452, 454 (Iowa 1987). But a mere disagreement on the part of the parties as to the meaning of terms does not automatically establish an ambiguity. Id. In this circumstance the test is an objective one: Is the language fairly susceptible to two interpretations? Id. In searching for the ordinary meaning of undefined terms in a policy, we commonly refer to dictionaries. See, e.g., Witcraft v. Sundstrand Health & Disability Group Benefit Plan, 420 N.W.2d 785, 788 (Iowa 1988) (for meaning of illness); North Star, 402 N.W.2d at 455 (for meaning of apparatus). We agree with those courts that have viewed the term damages in CGL policies as ambiguous because it is susceptible to more than one reasonable interpretation. As one court put it, the ordinary meaning of damages as defined by the dictionary supports this conclusion: The policy language, all sums which the insured shall become legally obligated to pay as damages because of property damage, can reasonably be interpreted to cover any claim asserted against the insured arising out of property damage, which requires the expenditure of money, regardless of whether the claim can be characterized as legal or equitable in nature. This interpretation is supported by the dictionary definition of damages which makes no distinction between damages at law and actions in equity. See Webster's Third New International Dictionary 571 (P. Gove ed. 1961) (damages are the estimated reparation in money for detriment or injury sustained: compensation or satisfaction imposed by law for a wrong or injury caused by [a] violation of a legal right). Minnesota Mining, 457 N.W.2d at 179-80; accord AIU Ins. Co., 51 Cal.3d at 825-26, 799 P.2d at 1267, 274 Cal.Rptr. at 834; C.D. Spangler Constr. Co., 326 N.C. at 152, 388 S.E.2d at 568-69; Boeing Co., 113 Wash.2d at 877, 784 P.2d at 511. Even insurance dictionaries define damages in the same broad manner. See, e.g., Merit, Glossary of Insurance Terms 47 (1980) (damages defined as the amount required to pay for a loss); Rubin, Barrons Dictionary of Insurance Terms 71 (1987) (damages defined as the sum the insurance company is legally obligated to pay an insured for losses incurred); Davids, Dictionary of Insurance 72 (1977) (damages defined as the estimated reparation in money for injury sustained). Interestingly enough, NEPACCO and Armco concede that the ordinary meaning of the term damages is broad and all inclusive: The dictionary definition does not distinguish between legal damages and equitable monetary relief. Thus, from the viewpoint of the lay insured, the term damages could reasonably include all monetary claims, whether such claims are described as damages, expenses, costs, or losses. NEPACCO, 842 F.2d at 985 (citations omitted); Armco, 822 F.2d at 1352 (citations omitted). This is not the first time our court has been asked to interpret the term damages in a CGL policy. We have interpreted the term damages broadly to include punitive as well as compensatory damages. City of Cedar Rapids v. Northwestern Nat'l Ins. Co., 304 N.W.2d 228, 231 (Iowa 1981), overruled on other grounds, 440 N.W.2d 377 (1989). We adopted the following language from a case decided by the Missouri Court of Appeals: Clearly the language of the policy before us does not limit recovery to actual or compensatory damages but undertakes to pay for all losses. Id. (citing Colson v. Lloyd's of London, 435 S.W.2d 42, 43-44, 47 (Mo.App.1968) (emphasis added). Several years later we said it again: Damages include punitive as well as compensatory damages. See Skyline Harvestore Sys. Inc. v. Centennial Ins. Co., 331 N.W.2d 106, 107 (Iowa 1983). We interpreted the term damages from the standpoint of what an ordinary man would believe the term to mean. Id. Clearly, we gave damages its ordinary meaning rather than any technical, legalistic meaning. We did not restrict its meaning to compensation paid to a third party for injuries or property damage sustained. Punitive damages are clearly not compensatory damages. Rather they are smart money permitted by the law to deter similar wrongful conduct in the future. Id. at 108. In City of Cedar Rapids, we cited with approval a definition of damages that obligates the insurer to pay for all losses. 304 N.W.2d at 231 (citing Colson v. Lloyd's of London, 435 S.W.2d 42, 43-44, 47 (Mo. App.1968)). This definition is certainly consistent with the ordinary meaning of damages adopted by the Minnesota court in Minnesota Mining: the estimated reparation in money for detriment or injury sustained: compensation or satisfaction imposed by law for a wrong or injury caused by a violation of a legal right. Minnesota Mining, 457 N.W.2d at 180. This ordinary meaning is broad enough to encompass payments used to clean up hazardous materials released due to the prior mishandling of such materials. Mountainspring, Insurance Coverage of CERCLA Response Costs: The Limits of Damages in Comprehensive General Liability Policies, 16 Ecology L.Q. 755, 791 (1989). In short we agree with the majority of courts which hold that the ordinary meaning of damages is broad enough to include government mandated response or cleanup costs under CERCLA and similar state environmental protection statutes. Consistent with our approach in City of Cedar Rapids and Skyline Harvestore Systems, Inc., we reject the defendants' suggestion that we give damages a technical, legalistic meaning. Rather, we give damages its ordinary meaning, a meaning the ordinary reasonable person would believe the term to mean. That meaning is this: the estimated reparation in money for detriment or injury sustained: compensation or satisfaction imposed by law for a wrong or injury caused by a violation of a legal right. Webster's Third New International Dictionary 571 (P.Gove ed. 1961). Under this meaning we think a reasonable person purchasing a CGL policy like the one here would expect government mandated response costs under CERCLA to be covered. These are costs A.Y. McDonald has become legally obligated to pay as compensation imposed by law for a wrong. As we shall shortly discuss, these costs are also the result of injuries sustained by the government. As one court observed, [the insureds] have become legally obligated to clean up their pollution by virtue of the polite but puissant compulsion of CERCLA. At least to the reasonable insured, this obligation is no less a legal sanction than that of a monetary judgment. Indeed, having purchased insurance to cover them for damages because of property damage, [the insureds] would be surprised indeed to learn that coverage depended on whether the proceeding employed to obtain recompense was defined as legal or equitable. An insured reading the coverage clause before us would reasonably conclude it provided coverage for any economic outlay compelled by law to rectify and mitigate property damage caused by the insured's pollution.... It would come as an unexpected, if not incomprehensible, shock to the insureds to discover that their insurance coverage was being denied because the plaintiff chose to frame his complaint in equity rather than at law. Aerojet-General Corp. v. Superior Court, 211 Cal.App.3d 216, 228, 257 Cal.Rptr: 621, 628 (1989). If the defendants intended a narrow technical definition of the term damages ..., it was their duty to make that intention clear. The insureds purchased these comprehensive general liability policies expecting coverage against most legal liabilities which could arise out of their own acts or omissions, including liabilities which were unknown at the time. The standard language used in the policy is broad. The insurers agreed that they will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies caused by an occurrence. The utility of the policy would be seriously called into question if coverage is permitted to hinge on such a fortuitous event as whether a plaintiff bringing an action against the insured has framed his complaint in equity rather than at law. Clearly the insureds under these policies contemplated greater certainty when they purchased the policies. They could reasonably expect the policy to provide coverage for any economic outlay compelled by law to rectify or mitigate damage caused by the insured's acts or omissions. Minnesota Mining, 457 N.W.2d at 181-82. See also, Pan Am. World Airways, Inc. v. Aetna Cas. & Sur. Co., 368 F.Supp. 1098, 1118-19 (S.D.N.Y.1973), aff'd, 505 F.2d 989 (2d Cir.1974). We hold that the term damages in these CGL policies includes government mandated response costs under CERCLA. According to two commentators our conclusion would not surprise the insurance industry. These commentators have reviewed the history of the CGL policy, the insurance industry's interpretation of the word damages in the industry's internal memoranda, the industry's published literature, and the industry's representations to the courts and to Congress. Based on this review the commentators conclude that until Armco, the insurance industry virtually always construed and used the word damages in the broadest sense. The industry clearly understood its standard form CGL policy to cover cleanup costs, whether imposed by CERCLA, common law, legislation analogous to CERCLA, or otherwise. Stanzler & Yuen, Coverage for Environmental Cleanup Costs: History of the Word Damages in the Standard Form Comprehensive General Liability Policy, 3 Colum.Bus.L.Rev. 449, 456 (1990). These authors cite to industry publications touting the fact that the CGL policy was so broad in coverage that no new coverage was needed to encompass unknown hazards. The unknown hazards were automatically covered. Id. at 462-65. According to the authors, [t]he insurance industry's original intent to incorporate into the insuring agreements and into the word damages wide, flexible coverage for unknown hazards conflicts with the Armco decisions. The industry valued and relied upon the reach of the policy to protect the policy-holder against unanticipated changes in circumstances.... [T]he insurance industry anticipated CERCLA liability. Liability under CERCLA fits well within the concept of the unknown hazard the industry designed the standard form CGL to cover. Id. at 464-65; see also D. Bickelhaupt, General Insurance 522 (1983) (CGL policy provides full automatic coverage ... for the so-called unknown perils, about which the insured knows nothing, or which would usually not be covered by any named-perils policy) (emphasis added); D. Ratcliffe, General Liability Insurance Handbook 159 (1959) (The CGL policy is designed to cover automatically the business hazards that come under the head of General Liability.) (emphasis added). Our inquiry on the coverage question does not end with our conclusion that government mandated response costs under CERCLA are damages within the meaning of the CGL policies. We must next determine whether such costs are the proper measure of property damage. In other words, are these damages because of property damage within the meaning of the policies?