Opinion ID: 1176222
Heading Depth: 3
Heading Rank: 4

Heading: aiu

Text: In AIU, supra, 51 Cal.3d 807, 274 Cal. Rptr. 820, 799 P.2d 1253, the United States and local administrative agencies filed suits against FMC Corporation (FMC), seeking relief for alleged violations of state and federal environmental laws, including CERCLA and the HSAA. ( Id. at p. 815, 274 Cal.Rptr. 820, 799 P.2d 1253.) FMC in turn sought declaratory relief against its insurers determining that any costs it might become obligated to pay as a result of the injunctive relief and/or reimbursement ordered in the third party suits were covered under its CGL policies. ( Id. at p. 816, 274 Cal.Rptr. 820, 799 P.2d 1253.) The insurance policies at issue provided coverage to FMC for all sums FMC became legally obligated to pay as damages (under two policy forms) or ultimate net loss (under a third) because of property damage. ( AIU, supra, 51 Cal.3d at p. 814, 274 Cal. Rptr. 820, 799 P.2d 1253.) We determined whether (i) any adverse orders issued in those suits would legally obligate FMC to pay such costs, (ii) the costs would constitute damages or ultimate net loss, and (iii) such costs would be incurred because of property damage. ( Id. at p. 818, 274 Cal. Rptr. 820, 799 P.2d 1253.) We noted that [o]nly if all three conditions [were] fulfilled [would] the insurers' duty to provide coverage arise under the policies. ( Ibid. ) The first requirement for coverage was that FMC be legally obligated to pay the costs at issue. We stated, Because it is clear that, if FMC is held liable in the third party suits, it will be `obligated' to pay for whatever relief the courts order, the only remaining question is whether that obligation may be considered `legal' under applicable rules of interpretation. ( AIU, supra, 51 Cal.3d at p. 824, 274 Cal.Rptr. 820, 799 P.2d 1253.) We declined to interpret the phrase legally obligated as providing coverage for only those actions traditionally brought in law and not in equity. ( Id. at pp. 824-825, 274 Cal.Rptr. 820, 799 P.2d 1253.) We observed that because the distinction between law and equity in California had generally been abolished, even a legally sophisticated policyholder might not anticipate that the term `legally obligated' precludes coverage of equitably compelled expenses. ( Id. at p. 825, 274 Cal.Rptr. 820, 799 P.2d 1253.) Thus, as a matter of plain meaning, the term `legally obligated' covers injunctive relief and recovery of response costs. ( Ibid. ) Moreover, even if the phrase raised doubts about whether a law-equity distinction was intended, it would be unreasonable to conclude that it unambiguously incorporated this sophisticated distinction into the policies. Any such ambiguity was resolved in favor of coverage. ( Ibid. ) Whether the term `legally obligated' is ambiguous or not, therefore, we conclude that it encompasses the types of relief sought in the third party suits. ( Ibid. ) We next determined whether FMC's prospective legal obligation in the third party suits was to pay damages. ( AIU, supra, 51 Cal.3d at p. 825, 274 Cal.Rptr. 820, 799 P.2d 1253.) In so doing, we rejected the construction of the term damages as `any sum expended under sanction of law' or sums paid to third persons as a result of `legal claims.' ( Id. at p. 827, 274 Cal.Rptr. 820, 799 P.2d 1253.) Although we agree that a layperson might reasonably define `damages' in such broad terms, it is unlikely that he would do so in the context of the coverage provision at issue here, taken as a whole. ( Ibid. ) Instead, we noted that the statutory and dictionary definitions of `damages' share several basic concepts. Each requires there to be `compensation,' in `money,' `recovered' by a party for `loss' or `detriment' it has suffered through the acts of another. ( Id. at p. 826, 274 Cal.Rptr. 820, 799 P.2d 1253.) In determining whether reimbursement of government response costs constituted damages, we concluded that the first element of the statutory and dictionary definitions of damages was fulfilled. ( AIU, supra, 51 Cal.3d at p. 828, 274 Cal.Rptr. 820, 799 P.2d 1253.) The agencies suffer `loss' or `detriment' in two separate ways when they incur response costs under CERCLA and similar statutes. First, release of hazardous waste into groundwater and surface water constitutes actual harm to property in which the state and federal governments have an ownership interest; this harm is `detriment' in statutory terms. [Citations.] Second, the agencies' out-of-pocket expenses of investigating and removing the waste as required by statute is `loss' incurred as a direct result of harm allegedly created through the unlawful act or omission of FMC. ( Id. at pp. 828-829, 274 Cal.Rptr. 820, 799 P.2d 1253.) We also concluded that the second element of statutory and dictionary definitions of damages was fulfilled. FMC's reimbursement of government response costs is monetary `compensation' for the loss suffered by the agencies when they proceed with environmental cleanups. ( AIU, supra, 51 Cal.3d at p. 829, 274 Cal.Rptr. 820, 799 P.2d 1253.) We rejected the insurers' argument that CERCLA intended that reimbursement of response costs be treated as conceptually distinct from recovery of damages. ( AIU, supra, 51 Cal.3d at pp. 830-831, 274 Cal. Rptr. 820, 799 P.2d 1253.) We stated, our ultimate conclusion as to whether reimbursement of response costs is `damages' for insurance purposes is, as noted above, predominantly a question of how, under state law, insurance policies should be interpreted. [Citations.] We are not bound by distinctions or definitions contained in CERCLA itself, if such distinctions do not reflect the intent of the parties to the CGL policies at the time of their formation. For this reason, even to the extent that CERCLA distinguishes between response costs and damages, this fact seems immaterial to the interpretation question at issue in this case. The parties' intent in entering the CGL policies could not possibly have been influenced by the niceties of statutory language adopted many years after the policies were drafted. ( Id. at p. 831, 274 Cal.Rptr. 820, 799 P.2d 1253, original italics.) We also noted that while reimbursement of response costs was essentially a form of restitution, both restitution and compensatory damages fell within the meaning of damages in the policies. ( AIU, supra, 51 Cal.3d at p. 836, 274 Cal.Rptr. 820, 799 P.2d 1253.) We observed that the relief sought in the underlying suits at issue here is not punitive, and distinguished it from those forms of restitution that as a matter of public policy cannot be covered by insurance. ( Id. at pp. 836-837, 274 Cal.Rptr. 820, 799 P.2d 1253.) We next considered whether any or all of the costs of complying with injunctions issued under CERCLA and similar statutes are `damages' under the CGL policies. ( AIU, supra, 51 Cal.3d at p. 838, 274 Cal. Rptr. 820, 799 P.2d 1253.) We noted that The statutes on which the third party suits are based provide that, in lieu of remedying contamination and seeking reimbursement, the agencies may obtain injunctions compelling responsible parties to both cease discharging hazardous waste and clean up damage already present. [Citation.] As courts and commentators have recognized, government cleanup efforts are generally considerably more expensive than cleanups performed by the responsible party. [Citations.] For this reason, federal and state governments generally seek voluntary and involuntary cleanup by the responsible party (pursuant to injunction if necessary) before performing it themselves and seeking reimbursement under CERCLA. ( Id. at pp. 837-838, 274 Cal.Rptr. 820, 799 P.2d 1253.) We noted, The costs of injunctive relief... do not readily satisfy the statutory or dictionary definitions of `damages.' Because such costs are paid to employees or independent contractors rather than aggrieved parties, they do not directly `compensate' aggrieved persons for `loss' or `detriment.' ( AIU, supra, 51 Cal.3d at p. 838, 274 Cal. Rptr. 820, 799 P.2d 1253.) We concluded, however, that it was unlikely that the parties to CGL policies intended to cover reimbursement of response costs but not the costs of injunctive relief, at least where the latter costs are incurredgenerally at a lower total costfor exactly the same purposes addressed through governmental expenditure of response costs. ( Ibid. ) In this respect, we noted that unlike traditional injunctive relief, which is generally only available when legal remedies such as monetary compensation are inadequate, injunctive relief may be available [under CERCLA], even though legal or restitutive remedies are adequate. ( Id. at pp. 838, 840, 274 Cal.Rptr. 820, 799 P.2d 1253.) In addition, the mere fact that the agencies sought an injunction did not indicate an absence of cognizable property damage or personal injury. Moreover, in its remedial aspects, the injunction results in exactly the type of expenditures involved in reimbursement of response costs, whether or not the agencies have an adequate remedy in the form of reimbursement. ( Id. at p. 840, 274 Cal.Rptr. 820, 799 P.2d 1253.) [I]njunctive relief is an equivalent substitute for the goal of government remedial action. ( Ibid. ) For these reasons, it would exalt form over substance to interpret CGL policies to cover one remedy but not the other. Given the practical similarity of remedies available under the environmental statutes at issue here, we believe a reasonable insured would expect both remedies to fall within coverage as `damages.' ( Ibid. ) We observed that CERCLA and the HSAA authorize alternative remediesinjunction and reimbursementthat are relatively interchangeable in a way perhaps not foreseen by the parties at the time they entered the CGL policies.... [T]he policies necessarily present some ambiguity in light of statutory schemes that by their very operation tend to eliminate the formal distinction between compensation paid to an aggrieved party and sums expended by the insured under compulsion of injunction. [Citation.] For this reason, although we take the statutory and dictionary definitions ... to be the `ordinary and popular' definition of `damages' for interpretation purposes, we will not apply this definition inflexibly. To the extent that policy language is ambiguous in light of the way environmental statutes authorize relief, our goal remains to protect the objectively reasonable expectations of the insured. ( AIU, supra, 51 Cal.3d at p. 828, 274 Cal.Rptr. 820, 799 P.2d 1253.) Finally, we observed that some costs required under environmental injunctions are prophylactic in nature, and stated these costs are not incurred `because of property damage,' and therefore are not covered by CGL policies. ( AIU, supra, 51 Cal.3d at p. 841, 274 Cal.Rptr. 820, 799 P.2d 1253.) Until such damage has occurred, whether on the waste site itself or elsewhere, there can be no coverage under CGL policies. ( Id. at p. 843, 274 Cal.Rptr. 820, 799 P.2d 1253.)