Opinion ID: 2610834
Heading Depth: 5
Heading Rank: 1

Heading: Reimbursement of government response costs

Text: (7) In numerous CERCLA suits seeking recovery from responsible parties, courts have routinely referred to reimbursement of response costs as damages, regardless of the nature of the cleanup performed or property interest possessed by the plaintiff. (See, e.g., Pennsylvania v. Union Gas Co. (1989) 491 U.S. 1, 19-20 [105 L.Ed.2d 1, 19-20, 109 S.Ct. 2273, 2284-2285]; Wickland Oil Terminals v. Asarco, Inc. (9th Cir.1986) 792 F.2d 887, 890; Jones v. Inmont Corp. (S.D.Ohio 1984) 584 F. Supp. 1425, 1429.) In the insurance context, this view is persuasive. 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. The first element of the statutory and dictionary definitions of damages is fulfilled in this case. 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. (Civ. Code, § 3282; Wat. Code, § 102 [All water within the State is the property of the people of the State, but the right to the use of water may be acquired by appropriation in the manner provided by law.].) 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. Viewed in this second context, such expenditure constitutes loss or detriment even as to agency efforts specifically directed at cleaning up property in which neither the state nor the federal government has an ownership interest. Under statute, the agencies are charged with the duty of removing hazardous waste, whether or not their proprietary interests are harmed or they ultimately are compensated for their efforts. They are not mere contractors who act out of an expectation of recompense for their cleanup work; their expenses are incurred as a matter of public duty rather than hope of private gain. Thus, when they seek reimbursement of their response costs, the basis of the claim is harm done to the public fisc. In ordinary terms, such harm constitutes loss or detriment. The language of the CGL policies themselves supports this view. The clauses at issue here cover sums expended as damages because of property damage. If damages is construed to include a requirement that the aggrieved party suffered harm to a proprietary interest in the damaged property, the latter phrase becomes redundant. The plain language of the policies therefore supports the conclusion that the agencies' out-of-pocket expenditures, irrespective of the government interest in the property sought to be cleaned up, constitute loss or detriment. The second element of the statutory and dictionary definitions of damages is also fulfilled in this case. FMC's reimbursement of government response costs is monetary compensation for the loss suffered by the agencies when they proceed with environmental cleanups. Moreover, because the compensable loss is all remedial out-of-pocket expenditures incurred by the agencies, the compensation sought from FMC includes reimbursement for costs of cleaning up existing contamination on and off the disposal site itself, investigating the extent of contamination or the viability of cleanup options, and monitoring the spread of waste from the site. (See, e.g., Intel, supra, 692 F. Supp. at p. 1192.) As long as some property damage, as defined below, has already taken place, the agencies' expenses for responding constitute loss or detriment, whether or not the expenses are attributable to actual cleanup, mitigation of damage, or investigation and monitoring. When the agencies seek reimbursement of such expenses from the insured under CERCLA, their claim is for compensation for all their expenses, not merely those resulting from actual cleanup efforts on government property. Any other conclusion would be illogical as a matter of the reasonable expectations of the insured. (See Aerojet, supra, 211 Cal. App.3d at p. 227; Globe Indem. Co. v. State of California (1974) 43 Cal. App.3d 745, 751 [118 Cal. Rptr. 75].) For three specific reasons not relating to the ordinary meaning of the word damages, however, the insurers contend that a reasonable interpretation excludes reimbursement of response costs from coverage under the CGL damages provision. First, they argue that because CERCLA distinguishes response costs from damages, it mandates the same distinction in the insurance context because the agencies do not seek damages as prescribed by statute. Second, the insurers contend that because environmental statutes authorize the agencies to recover response costs even if they suffer no property damage or personal injury, such recovery is a government-imposed cost of doing business rather than compensation for loss or detriment. Finally, the insurers contend that reimbursement is best characterized as restitutive relief, the measure and purpose of which is sufficiently different from damages to render the two concepts mutually exclusive. None of these arguments is persuasive in the insurance context. (i) Statutory distinctions between response costs and damages. (8) CERCLA expressly distinguishes between recovery of response costs and recovery of damages to natural resources. (See 42 U.S.C. § 9607(a).) The difference between the two types of recovery and the way they are to be measured by the courts, however, is neither clearly laid out in the statute itself nor fully explained in its sparse legislative history. On the one hand, several sections of the statute suggest that response costs are essentially a subset of damages. (See, e.g., id., § 9607(f)(1) [providing that measure of damages to natural resources shall not be limited to the sums which can be used to restore or replace such resources].) On the other hand, statements made during legislative debate regarding the remedies provisions suggest that government recovery of damages to natural resources is limited to the lesser of the diminution in value of the natural resources in question or the cost of restoring such resources. (See State of Idaho v. Bunker Hill Co. (D.Idaho 1986) 635 F. Supp. 665, 675-676 [quoting statements of Sen. Simpson].) However damages and response costs are measured, we do not believe, as the insurers contend and several courts have concluded (see, e.g., NEPACCO, supra, 842 F.2d at p. 986; Mraz v. Canadian Universal Ins. Co., Ltd., supra, 804 F.2d at p. 1329), that CERCLA intended that reimbursement of response costs be treated as definitionally or conceptually distinct from recovery of damages. Congress clearly intended considerable overlap between the two forms of recovery. It is clear that response costs can, in certain situations, be recovered as damages to natural resources. (See, e.g., United States v. Shell Oil Co. (D.Colo. 1985) 605 F. Supp. 1064, 1084-1085, fn. 10.) Indeed, one court recently held that the cost of restoration is the proper measure of statutory damages, even if greater than the diminution in value of harmed property. (See State of Ohio v. U.S. Dept. of the Interior (D.C. Cir.1989) 880 F.2d 432, 459.) Seen in this light, whether recovery of remedial costs is sought under the response cost subdivision or that allowing recovery for damages to natural resources, it can be construed to fall within the scope of the insurance policies at issue here. Moreover, we fail to see how the distinction made by CERCLA between response costs and damages to natural resources  forecloses response costs from being characterized as damages in a generic sense under CGL policies. More significantly, 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. (Cf. Aerojet, supra, 211 Cal. App.3d at p. 235; Chesapeake Utilities Corp. v. American Home Assur., supra, 704 F. Supp. at p. 560; Intel, supra, 692 F. Supp. at pp. 1186-1187; Specialty Coatings, supra, 535 N.E.2d 1071, 1080.) 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. (ii) Reimbursement of response costs as a cost of doing business. (9) The insurers also contend that FMC's reimbursement of response costs does not constitute damages because it does not depend on the incidence of any tangible harm to government property. Instead, they argue, such reimbursement is merely a cost of complying with the regulatory objectives of government agencies, and in this sense is an uninsurable cost of doing business instead of compensation for detriment suffered by the agencies. As one court has concluded, [u]nder CERCLA, the rule is simply that he who releases hazardous substances must pay for the cleanup. In other words, response costs are simply a government-imposed cost of doing business for firms which release hazardous substances. Such costs are not covered by CGL policies, any more than the cost of installing fire extinguishers as required by the Occupational Safety and Health Administration would be covered. ( Aetna Cas. & Sur. v. Gulf Resources & Chem. Corp., supra, 709 F. Supp. at p. 962.) In Armco, supra, 822 F.2d 1348, the Fourth Circuit Court of Appeals focused on this argument in holding that reimbursement of response costs under CERCLA is not covered by CGL policies: From an insurer's perspective, investigative and remedial action taken by the government respecting potential environmental hazards constitutes a prophylactic measure.... [In this case, the government] has intervened immediately upon learning of the toxic contamination. The case thus presents no instance of harm to human or animal life, but merely the prevention of such harm. ( Id. at pp. 1353-1354.) As reflected by Aetna Cas. & Sur. v. Gulf Resources & Chem. Corp . and Armco, the argument that reimbursement of response costs is uninsurable has two strands, both emanating from the fact that government agencies rather than private landowners are the parties seeking reimbursement. First, government agencies have only a regulatory interest in the property sought to be cleaned up. Second, the response they seek is prophylactic in nature, and therefore cannot be the subject of insurance. Neither of these arguments possesses merit in the context of the environmental cleanups at issue here. The first contention fails to take into account the principles that guide interpretation of insurance policies. An ordinary definition of damages does not necessarily focus on the aggrieved party's proprietary interest; it is sufficient that the party have suffered some detriment, purely regulatory though it may be, that is compensable by an award from a responsible party. (See ante, pp. 828-829.) Although the second argument has some merit in the abstract, it misperceives the nature of the response costs sought by the agencies in most hazardous waste cases, including this one. As is discussed below, it is true that government regulations or court orders requiring businesses such as FMC to undertake purely prophylactic measures designed to prevent future discharges of hazardous waste result in costs that are not covered by CGL policies. Such government actions are distinguishable, however, from the reimbursement sought by the agencies here, as well as that in cases such as Armco, supra, 822 F.2d 1348. In our view, the Armco approach to what constitutes damages for insurance policy purposes is unduly narrow. In many contexts, a party may recover damages without any harm to human or animal life having occurred. The absence of such harm does not vitiate the loss incurred by the agencies in undertaking remedial measures. Because the third party suits here (like that at issue in Armco ) 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 and mitigative actions. [13] Recovery of the costs of both types of measures is damages in ordinary terms. A release of hazardous waste constitutes an unlawful act or omission that causes detriment to government interests (i.e., out-of-pocket loss), and reimbursement of response costs is compensation therefor in money. 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 (i.e., the costs are mitigative in character), reimbursement of such costs constitutes damages in ordinary terms. A contrary result would fail to fulfill the reasonable expectations of the parties. (See Aerojet, supra, 211 Cal. App.3d at p. 227, citing Globe Indem. Co. v. State of California, supra, 43 Cal. App.3d at p. 751 [it would seem strangely incongruous to the insured that his policy would cover him for damages to tangible property destroyed through his negligence in allowing a fire to escape but not for the sums incurred in mitigating such damages by suppressing the fire]; Goodyear Rubber & Supply v. Great Am. Ins. Co. (9th Cir.1976) 545 F.2d 95, 96 [It would be a strange kind of justice, and a stranger kind of logic, that would hold the defendant to be liable for as much as $450,000 if the barge and its contents had been consumed by fire, but free of liability for a much lesser amount because of the fortuity of rescue.]; Intel, supra, 692 F. Supp. at p. 1192; Bankers Trust Co. v. Hartford Acc. & Indem. (S.D.N.Y. 1981) 518 F. Supp. 371, 373-374; Leebov v. United States Fidelity and Guaranty Co. (1960) 401 Pa. 477 [165 A.2d 82, 84].) For this reason, we consider it immaterial to the issue before us whether or not the agencies, in seeking reimbursement of response costs, have suffered harm to a proprietary interest. Unlike the situation when agencies seek prophylactic measures, reimbursement of environmental response costs  whether incurred for remedial or mitigative purposes  is not an uninsurable cost of doing business. [14] (iii) Reimbursement of response costs as restitution. (10) The insurers contend that reimbursement of response costs is restitution, which they view as mutually exclusive from damages. This argument has two separate thrusts: one going to the measure of the types of relief at issue, and one concerning the fundamental character of such relief. The flaw in the insurers' contention is that neither of these strands takes into account the ultimate considerations underlying judicial interpretation of insurance policies. Even if recovery of response costs is technically restitution rather than damages, this fact is of little consequence to policy interpretation in the absence of evidence on the face of the policies that technical distinctions were intended. The insurers' argument as to the measure of relief is as follows: recovery of common law damages is limited to the lesser of the diminution in value of property harmed or the costs of repair. Reimbursement of response costs, however, resembles the costs of repair, which may be higher than diminution in the value of property. If costs of repair exceed the value of damaged property (as they often may under CERCLA), either the entire recovery or, at a minimum, the excess cannot be considered damages because it exceeds the actual harm to the plaintiffs' property. (See, e.g., NEPACCO, supra, 842 F.2d at pp. 986-987; Travelers Ins. Co. v. Ross Elec. of Washington, Inc., supra, 685 F. Supp. at p. 744; Hanna, supra, 224 F.2d at p. 503.) The insurers' argument contains several flaws. First, recovery of tort damages is not invariably limited by the value of damaged property. The courts have recognized that recovery in excess of such value may be necessary to restore the plaintiff to the position it occupied prior to a defendant's wrongdoing. (See, e.g., Heninger v. Dunn (1980) 101 Cal. App.3d 858, 863 [162 Cal. Rptr. 104] [permitting recovery of reasonable repair costs in excess of value of damaged property, when plaintiff has personal reason for making repairs]; Dandoy v. Oswald Bros. Paving Co. (1931) 113 Cal. App. 570, 572-573 [298 P. 1030] [To hold that appellant is without a remedy merely because the value of land has not been diminished, would be to decide that by wrongful act of another, an owner of land may be compelled to accept a change in the physical condition of his property, or else perform the work of restoration at his own expense. This would be a denial of the principle that there is no wrong without a remedy.]; see generally Rest.2d Torts, § 929.) Second, even if the courts generally award tort damages in an amount limited to the lesser of the value of damaged property or the costs of repair, that does not mandate that a greater recovery authorized by state or federal statutes therefore should be held to constitute something other than damages in conceptual terms. (See State of Ohio v. U.S. Dept. of the Interior, supra, 880 F.2d at p. 459.) Even if a court applying common law might not award the full extent of such costs, the excess above what is awarded remains damages for insurance policy interpretation purposes. The whole recovery of response costs, not just the amount limited to the value of harmed property, constitutes loss or detriment for harm caused by FMC's allegedly unlawful act or omission. This brings us to the alternative thrust of the insurers' argument: reimbursement of government response costs is not damages because it is a restitutive remedy that is specific rather than substitutive in character. The United States Supreme Court recently adopted this distinction in discussing whether a state's claim for reimbursement of federal Medicaid subsidies is a claim for money damages under the terms of the Administrative Procedure Act (APA) (5 U.S.C. § 702). Characterizing such a claim as one for restitution, the high court held that it was therefore not a claim for money damages: Our cases have long recognized the distinction between an action at law for damages  which are intended to provide a victim with monetary compensation for an injury to his person, property, or reputation  and an equitable action for specific relief  which may include an order providing ... for `the recovery of specific property or monies. ...' ( Bowen v. Massachusetts (1988) 487 U.S. 879, 893 [101 L.Ed.2d 749, 763, 108 S.Ct. 2722] [citation omitted, italics in original]; see also Maryland Dept. of Human Resour. v. Dept. of H.H.S. (D.C. Cir.1985) 763 F.2d 1441, 1446 [the term `money damages' [under the APA] ... normally refers to a sum of money used as compensatory relief. Damages are given to the plaintiff to substitute for a suffered loss, whereas specific remedies `are not substitute remedies at all, but attempt to give the plaintiff the very thing to which he was entitled.' [Citation omitted.]].) We, too, have recognized a distinction between restitution and compensatory damages. (See McHugh v. Santa Monica Rent Control Bd., supra, 49 Cal.3d at p. 363 [maj. opn.]; id. at p. 387 [Panelli, J., conc.].) Reimbursement can reasonably be labelled a restitutive remedy, either because it awards a plaintiff the very thing to which he was entitled (see Maryland Dept. of Human Resour. v. Dept. of H.H.S., supra, 763 F.2d at p. 1446), or because it attempts to compensate a plaintiff for the cost of performing the duty of another (see Rest., Restitution, § 115 [providing that a person who performs the duty of another is entitled to restitution]). This label does not, however, preclude characterization of the amounts in question here as damages awarded to compensate a plaintiff for out-of-pocket expenditures. Indeed, restitution, to which the insurers analogize the reimbursement at issue here, is frequently denominated as one type of damages for descriptive purposes. (See, e.g., McHugh v. Santa Monica Rent Control Bd., supra, 49 Cal.3d at p. 363; U.S. v. Conservation Chemical Co., supra, 653 F. Supp. at pp. 192-193; Rest.2d Torts, § 903 [defining compensatory damages as damages awarded to person as compensation, indemnity or restitution for a harm sustained by him]; 5 Corbin on Contracts (1964) § 996, p. 15 [noting that damages is frequently used to denote any sum of money for which a court gives judgment to an injured party, but rejects this usage for purposes of treatment of contract damages]; Dobbs, Handbook on the Law of Remedies (1973) § 4:5.) Whatever technical distinctions we and other courts have drawn between restitution and compensatory damages in other contexts, in ordinary terms both concepts are within the definition of damages. For the purposes of interpretation, this fact is dispositive. (11) Nonetheless, because reimbursement of response costs is restitutive in that it attempts to restore to the agencies the value of a benefit constructively conferred on FMC, we consider one further argument. California courts have held that, as a matter of public policy, an insured's payment of certain types of restitution cannot be covered by insurance. (See, e.g., State Farm Fire & Cas. Co. v. Superior Court (1987) 191 Cal. App.3d 74 [236 Cal. Rptr. 216] [insurer has no duty to defend criminal prosecution of insured, because restitution to victims of criminal conduct is punitive remedy not coverable as damages]; Jaffe v. Cranford Ins. Co., supra, 168 Cal. App.3d 930 [insurer has no duty to defend insured against criminal prosecution for Medicaid fraud, despite fact that state could have sought civil reimbursement of fraudulently procured funds instead of prosecuting; such reimbursement would be restitution, not damages].) These cases are inapposite. Unlike State Farm Fire & Cas. Co. v. Superior Court, supra, 191 Cal. App.3d 74 the relief sought in the underlying suits at issue here is not punitive. CERCLA, for example, is a strict liability statute that serves essentially remedial goals, irrespective of fault. (See, e.g., United States v. Northeastern Pharmaceutical, supra, 810 F.2d at pp. 732-737, 740-741; J.V. Peters & Co., Inc. v. Administrator, EPA (6th Cir.1985) 767 F.2d 263, 265-266; State of N.Y. v. Shore Realty Corp. (2d Cir.1985) 759 F.2d 1032, 1043-1044.) Reimbursement of response costs, moreover, is not restitutive in the narrow sense identified by Jaffe as inappropriate for insurance coverage. (See Jaffe v. Cranford Ins. Co., supra, 168 Cal. App.3d at p. 935 [Although the concept of `restitution' may have a broader meaning in other contexts, we limit our reference to it here to situations in which the defendant is required to restore to the plaintiff that which was wrongfully acquired.]; Aerojet, supra, 211 Cal. App.3d at p. 231 [distinguishing Jaffe on this basis].) (12) (See fn. 15.) In short, we are not persuaded that the relief at issue here is of the narrow type identified by these cases as not a proper subject of coverage by insurance. [15] We conclude that reimbursement of environmental response costs is damages under the terms of the insurance policies at issue here, and that public policy does not prevent coverage. [16]