Opinion ID: 575203
Heading Depth: 3
Heading Rank: 1

Heading: Cleanup costs as damages

Text: 67 The Policy provides coverage for all sums which the insured shall become legally obligated to pay as damages because of ... property damage to which this insurance applies. In holding that Intel was entitled to summary judgment on the issue of coverage, the district court determined that the expenses Intel incurred pursuant to the consent decree constituted damages within the meaning of the policy. We affirm the district court on this issue. Relying on the decision of the California Supreme Court in AIU Ins. Co. v. FMC Corp., 51 Cal.3d 807, 274 Cal.Rptr. 820, 799 P.2d 1253 (1990) (AIU), issued subsequent to the district court's decision in this case, we hold that these expenses are damages within the meaning of the policy. 68
69 FMC was insured by AIU under a series of policies which contained damages language identical or similar to the clause in Intel's policy with Hartford. The U.S. and local administrative agencies (collectively, the agencies) filed suit against FMC for alleged violations of CERCLA and other environmental statutes. The agencies sought injunctive relief compelling decontamination of FMC waste disposal sites, and reimbursement for the agencies' costs of investigating and monitoring waste disposal and initiating cleanup. FMC sought recovery from its insurer for costs incurred pursuant to these suits. 70 The California Supreme Court held that FMC's costs of complying with the injunction and the reimbursement it was required to pay were sums ... [FMC became] legally obligated to pay as damages because of ... property damage. It looked first at the phrase legally obligated, and found that although both injunctions and awards of response costs under CERCLA reasonably can be viewed as equitable relief, as a matter of plain meaning, the term 'legally obligated' covers injunctive relief and recovery of response costs. AIU, 799 P.2d at 1266. 71 The court then examined the two forms of relief the agencies sought. It first explored more generally the term damages. It noted that, while statutory and dictionary definitions of damages were relatively straightforward, the application of this term to the remedies available to the agencies under CERCLA creates some ambiguity: 72 [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. 73 . . . . . 74 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. 75 Id. at 1268-69. 76 The court then held that reimbursement of government response costs constituted damages within the meaning of the policy: 77 The ordinary, nontechnical meaning of damages, as stated by statute and dictionaries and used by the courts in related contexts, encompasses reimbursement of response costs. The agencies' expenditure of federal funds to investigate and initiate cleanup of hazardous waste constitutes loss or detriment. Furthermore, reimbursement by responsible parties is monetary compensation for such loss. 78 Id. at 1269. 79 The court rejected several arguments against its holding. In particular, it rejected the argument that the distinctions or definitions contained in CERCLA with regard to the types of available relief were relevant to its determination: at issue was the interpretation of the insurance policy under state law. It also rejected the argument that the agencies' remedial action was prophylactic in nature: 80 Because the third party suits here rest on allegations of past and present damage to land and water on and surrounding hazardous waste sites, they concern reimbursement not for prophylactic purposes, but rather for remedial mitigative actions. 81 . . . . . 82 Thus, even if government response costs are incurred largely to prevent damage previously confined to the insured's property from spreading to government or third party property (ie., the costs are mitigative in character), reimbursement of such costs constitutes damages in ordinary terms. 83 Id. at 1272. 84 The court then turned to the issue of the costs of compliance with injunctions. It acknowledged that [t]he costs of injunctive relief, whether incurred for prophylactic, mitigative, or remedial purposes, do not readily satisfy the statutory or dictionary definitions of 'damages.'  Id. at 1276. However, it observed that the relationship between injunctive and reimbursement relief under CERCLA is not the same as that between damages and injunctive remedies traditionally available at common law and in equity. Id. Government agencies seek injunctive relief rather than incur costs themselves because government cleanup efforts are generally considerably more expensive than cleanups performed by the responsible party. Id. at 1275. Under CERCLA and similar statutes, injunctive relief and reimbursement of response costs serve substantially the same purpose. Id. at 1278. It is 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. Id. Thus, the court found: CGL policy language is ambiguous as applied to remedial and mitigative costs incurred pursuant to injunction under CERCLA and similar statutes, and therefore must be construed in favor of coverage to satisfy the reasonable expectations of the insured. Id. It would apply this construction regardless of any formal or technical difficulties this reading poses. Id. at 1278 n. 18. 85 In concluding, the court interpreted the phrase because of property damage. It held that all costs arising from the contamination at issue were incurred  'because of' property damage, whether the cleanup took place on the property of FMC or of third parties: The provisions at issue here do not specify that coverage hinges on the nature or location of property damage. We therefore construe them to encompass damages because of property damage in general, regardless of by whom it is suffered. Id. at 1279. However, the court also noted one exception to the insurer's obligation to cover cleanup costs: costs incurred to pay for prophylactic measures, measures taken in advance of any release of hazardous waste, were not covered by the policies. Id.
86 Under AIU, costs incurred to comply with an injunction mandating cleanup or to reimburse a government agency for cleanup expenses the agency has incurred are damages within the meaning of the insurance policy. We must now determine, however, whether the California Supreme Court would extend this holding and find that costs incurred to comply with a consent decree are damages. We conclude that it would. 6 87 The first issue is whether such costs are sums the insured are legally obligated to pay. That the insured voluntarily assumed the obligation to conduct cleanup, rather than forcing the government to assume the expenses of a coercive suit or of cleanup itself, should not change the analysis that a legal obligation to be responsible for cleanup does exist. 88 Our analysis of whether consent decree costs are damages parallels the AIU court's discussion of injunctive relief. Consent decrees are an alternative means for government agencies to ensure that cleanup takes place. They are a favored method, as they provide for more rapid, and less costly, cleanup than does full scale litigation. See 42 U.S.C. § 9622(a) (authorizing the President to facilitate agreements with potentially responsible persons in order to expedite effective remedial actions and minimize litigation). Faced with an obligation that it will have to meet, sooner or later, an insured would reasonably expect that, if it acts responsibly and cooperates with government agencies, it will not forego coverage to which it would be entitled if it forced the agencies to expend their resources in filing suit, particularly where cooperation will probably result in compliance at a lower cost to the insured (and thus to the insurer). Cf. AIU, 274 Cal.Rptr. at 845 (it is unlikely parties to CGL policies intended to cover reimbursement of response costs, but not costs of injunctive relief under which the parties arrive at the same result at a lower total cost); Globe Indem. Co. v. People, 43 Cal.App.3d 745, 118 Cal.Rptr. 75, 79 (1974) (where insured is covered for damage to property of third parties, insured could reasonably expect coverage would also exist for costs of mitigating such damage). Coverage of cleanup costs should not turn on the fortuity of the form in which the offending company fulfills its cleanup responsibilities. See AIU, 799 P.2d at 1278 (espousing rationale that making insurance coverage hinge on  'mere fortuity'  of the government's choice of enforcement methods would introduce substantial inefficiency in the cleanup process). Thus, we hold that the damages language is ambiguous as to coverage of this alternative means of CERCLA enforcement as well and, construing the clause, as we must, against the insurer, Hanson v. Prudential Insurance Co., 783 F.2d 762, 764 (9th Cir.1985), we find costs incurred pursuant to a consent decree are covered damages. 89 Public policy supports this holding. If consent decree compliance costs did not constitute damages, insureds would be discouraged from entering into consent decrees, and the EPA's task would be made more time consuming and more costly. Cleanup would be delayed until the government expended its resources to investigate contamination, and perhaps even to conduct cleanup itself, and finally sought relief from the insured. See Stephen Mountainspring, Insurance Coverage of CERCLA Response Costs: The Limits of damages in Comprehensive General Liability Policies, 16 Ecology L.Q. 755, 797-98 (1989) (insurance coverage of response costs would encourage PRP cooperation and thus contribute to conserving government resources). The policy arguments on the other side are not persuasive. Arguably, insureds, confident of the deep pockets of the insurer, will have no incentive to minimize their liability by finding the least costly means of decontamination, assuming cleanup obligations only when they are clearly responsible, and preventing contamination in the first place. See Maryland Casualty Co. v. Armco, Inc., 822 F.2d 1348, 1355 (4th Cir.1987) (insured would tend to overuse free resource of insurance), cert. denied, 484 U.S. 1008, 108 S.Ct. 703, 98 L.Ed.2d 654 (1988). However, certain checks remain in place. The insured will always be concerned that the insurer might deny coverage under an exclusion, and thus will have an incentive to minimize decontamination costs and to prevent pollution. Also, it defies common sense to suggest that a party ever has an incentive voluntarily to assume liability for contamination for which it does not strongly believe it is responsible. Finally, we rely on the good faith of insureds to conduct responsibly their negotiations with government agencies. 90 Potentially more troubling is the difference between consent decrees and suits for injunctive relief or reimbursement. Such suits have a coercive dimension not present in the context of a consent decree. A consent decree is more akin to a settlement. Generally, insurers have an active role in any settlement by the insured. In the case before us, though, the insured has had no such participation. As we have just noted, however, we believe insureds have adequate incentives to protect their own, and thus their insurers', interests when they negotiate consent decrees. Insureds are unlikely carelessly to enter into overbroad consent decrees. Moreover, our holding here will give insurers incentives to do what Hartford has failed to do in this case: to follow more closely the insured's efforts to meet its cleanup obligations.