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concluding that a reasonable defense "even for a clearly liable party" requires investigative studies necessary to limit damages or the scope of remedial action the party is required to undertake
Summary of this case from Domtar, Inc. v. Niagara Fire Ins. Co.Opinion
[Copyrighted Material Omitted] [Copyrighted Material Omitted] [Copyrighted Material Omitted] [Copyrighted Material Omitted] [Copyrighted Material Omitted] Opinion certified for partial publication.
Pursuant to California Rules of Court, rule 976.1, parts I and II of this opinion are not certified for publication.
Reprinted without change for tracking pending review and disposition by the Supreme Court.
Superior Court of San Mateo County, No. 262425, John J. Bible, Judge.
Retired judge of the San Mateo Superior Court sitting under assignment by the Chairperson of the Judicial Council.
See footnote 1, ante, page 354.
COUNSEL
Nossman, Guthner, Knox & Elliott, Scott P. DeVries and Jose N. Uranga for Cross-complainants and Appellants.
Bishop, Barry, Howe, Haney & Ryder, Jeffrey N. Haney, William R. Brown, Boornazian, Jensen & Garthe, Bruce Winkleman, Carroll, Burdick & McDonough, James B. Clapp, Horvitz & 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, Steve Crane, Mike Colliau, J. Burleigh Arnold, Newton, Kastner & Remmel, Stephen Newton, O'Melveny & Myers, Martin S. Checov, Orrick, Herrington & Sutcliff, Jeffrey S. White, Pruess, Walker & Shanagher, Gary T. Walker, Rivkin, Radler & Kremer, Donald McMillan, George Keller, Michael Skaggs, Ropers, Majeski, Kohn, Bentley, Wagner & Kane, Richard K. Wilson, Sedgwick, Deter, Moran & Arnold, Roger Sleight, Jeffrey Miller, Skadden, Arps, Slate, Meagher & Flom, Irene Sullivan, Thomas R. Harrell, Francis J. Stillman, Loraine A. Wallace, Wilson, Eelser, Moskowitz, Edelman & Dicker, Debra S. Strummer and Stephen P. Randall for Cross-defendants and Respondents.
OPINION
HANING, J.
This declaratory judgment action was instituted by Aerojet-General Corporation and Cordova Chemical Company (collectively Aerojet) to secure a determination of the rights and obligations of the parties under Comprehensive General Liability Insurance (CGL) policies that over 50 insurers (insurers) issued to Aerojet from 1956 to 1984. Aerojet sought insurance coverage for losses resulting from contamination of groundwater with toxic chemicals from unlined ponds and trenches where Aerojet's chemical wastes had been deposited at its industrial facility near Sacramento. Judgment was rendered for insurers after a jury determined they were not obligated to indemnify Aerojet for any of the policy years at issue.
Cordova Chemical Company was a part of Aerojet until 1977, at which point it came into existence as a separate corporation, wholly owned by Aerojet.
Aerojet's appeal questions the court's construction of CGL policy provisions, especially policy exclusions. Aerojet challenges numerous evidentiary and procedural rulings, and raises several issues involving reimbursement of defense costs. We affirm in part and reverse in part.
Background
The salient facts are largely undisputed. In 1951 Aerojet established an 8,500-acre facility 15 miles east of Sacramento, California, for the purpose of developing, testing and building rocket systems. Aerojet's Sacramento facility was devoted primarily to the development and production of missile and rocket motors for the Air Force, Navy, Army and National Aeronautics and Space Administration. Examples of the contract programs performed at Aerojet's site during the 1950's through 1970's include Gemini, Apollo, Delta, Titan, Polaris, Minuteman, Hawk, Genie, Tartar, Standard Missile and Harpoon. By 1961 the Aerojet site consisted of nearly 800 buildings staffed by approximately 17,000 engineers, technicians, security, service and administrative personnel in the shops, laboratories, offices and test areas. Aerojet used various chemicals in the performance of its work, which were primarily disposed of on-site and included trichloroethylene (TCE), a hazardous chemical solvent used by Aerojet primarily for metal and equipment cleaning operations. TCE was described by Aerojet's counsel as "the very life blood of Aerojet's operation." It was brought onto the Aerojet site in 10,000-gallon railroad tank cars, and by 1972 Aerojet had used 4,000,000 to 5,000,000 gallons of TCE in its operations. Chemical wastes resulting from Aerojet's operations, some of which contained TCE, were discharged into large earthen pits and trenches which were excavated and designed specifically for this purpose.
In 1979 the presence of hazardous chemicals, including TCE, was discovered in the groundwater beneath the site and other nearby property. Further investigation determined that contaminants from Aerojet's earthen pits and trenches were seeping into the soil and polluting the groundwater, ultimately reaching the American River.
The presence of these chemicals in the groundwater and soil resulted in legal action against Aerojet by both the United States and the State of California, as well as numerous private litigants. The state initially sued Aerojet in state court, primarily under the Porter-Cologne Water Quality Control Act (Porter-Cologne Act) (Wat. Code, section 13000 et seq.), and subsequently filed a parallel action along with the United States in the federal district court under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) (42 U.S.C. section 9601 et seq.). The state and federal actions sought reimbursement for the cost of remediation of the contamination, and ultimately resulted in a partial consent decree under which Aerojet agreed to undertake the cleanup. The actions by the private parties sought money damages for personal injury and property damage. As the various governmental and private lawsuits were commenced, Aerojet sought indemnification and a defense from its insurers.
CERCLA was amended in 1986 by the Superfund Amendments and Reauthorization Act of 1986 (SARA). (42 U.S.C. section 9601 et seq.)
Several insurers sought declaratory relief to clarify their obligation to Aerojet. In this same litigation, Aerojet cross-complained against over 50 underwriters and insurance companies which issued policies to Aerojet during the 1956-1984 period in question. Aerojet's cross-complaint raised questions with respect to the insurers' duty to defend and/or indemnify it in 38 enumerated lawsuits consisting of 3 governmental actions and 35 private actions. Aerojet's cross-complaint ultimately went to trial and is the subject of this appeal. The litigation involved numerous parties and issues. The major issues were divided into distinct and separate phases, each necessarily foundational to the next. We have grouped Aerojet's appellate arguments in accordance with the phases in which the case was tried.
A number of insurers have settled, others have brought successful motions for summary judgment, and we have been provided notice of several insurers' bankruptcy.
The parties have filed extensive briefs raising a multitude of arguments and counter-arguments. We address only those issues we consider necessary to the resolution of this appeal. Furthermore, points not supported by legal argument and citation of authorities are deemed waived. (Wint v. Fidelity & Casualty Co. (1973) 9 Cal.3d 257, 265 [107 Cal.Rptr. 175, 507 P.2d 1383, 90 A.L.R.3d 1185].)
Phase I was tried to the court sitting without a jury and involved the interpretation of policy language, particularly the coverage exclusions.
Phase II was tried before a jury, and involved the application of the policy language, as interpreted in phase I, to the facts to determine whether Aerojet had insurance coverage for the claims at issue. The jury trial conducted during phase II centered primarily on whether coverage was barred by either of two exclusionary clauses in the policies: (1) the expected/intended exclusion and (2) the pollution exclusion. The jury heard evidence for over three months, and returned a unanimous verdict against Aerojet for all the years at issue.
Phase III involved duty to defend issues, specifically, whether the insurers owed Aerojet any costs for defense beyond those which had already been paid. By stipulation, the only issue tried to the jury during phase III was: "What sums, if any, expended by Aerojet for investigation are defense costs?" The unanimous verdict awarded Aerojet nothing for its costs of investigation. The court also had to decide whether it was appropriate for Aerojet to share in the defense cost allocation for the years it chose to obtain "cash-flow" primary insurance.
Phase IV involved the allocation of responsibility among the insurers with indemnification liability but never occurred because no insurer was found liable.
Discussion
When the trial court invited the parties' views on managing complex litigation, Aerojet objected to this phased procedural approach and argued that the case should proceed as a normal civil trial. That is, "There should be one trial ending in one verdict." This objection is resurrected on appeal.
As Aerojet acknowledges, the court possesses broad authority to take an active, hands-on approach to the management of complex litigation. (See Code Civ. Proc., sections 1048, subd. (b), 592 & 598; Cottle v. Superior Court (1992) 3 Cal.App.4th 1367, 1380 [5 Cal.Rptr.2d 882].) We conclude the phasing approach adopted by the trial court has much to recommend it. Its principal virtue is the resolution of the nonjury policy interpretation issues first, so that the governing law was established before the jury heard evidence regarding Aerojet's pollution-causing activities. The complexity of issues and volume of evidence presented during the evidentiary phase before the jury was best accomplished by an uninterrupted hearing with well-established ground rules.
After the jury determined whether any of the insurers had indemnification liability, issues such as stacking of coverage, apportionment of liability among insurers, and allocation of costs to defense or indemnity could be resolved with only the individual insurers necessary. Notwithstanding Aerojet's arguments to the contrary, it appears that the trial court crafted the challenged phasing order to serve the overall needs of the litigation, rather than the interests of any particular party. Consequently, we see no abuse of discretion.
I, II *
III. Phase III: Costs of Defense
A. Defense or Cleanup
Aerojet contends the court erroneously instructed the jury regarding its entitlement to its expenses of defending the private and governmental actions filed against it based on its pollution of the groundwater. Aerojet's defense against the private and governmental claims and actions was handled by Aerojet's own counsel who represented it in this action. By stipulation of the parties entered after the phase II verdict, it was agreed that under specified conditions not pertinent here, all sums already paid by insurers to Aerojet as defense costs were properly payable and not reimbursable, and that they would continue to assume responsibility for Aerojet's defense costs until this appeal is finally resolved.
Pursuant to the stipulation, the sole issue tried to the jury in phase III was whether certain costs incurred by Aerojet in investigating the extent of its contamination and devising a plan to treat it (hereafter site investigation costs) were recoverable from its insurers as defense costs. Again, a unanimous jury found the insurers were not obligated to reimburse Aerojet for any of its site investigation costs.
We preliminarily note that the term "costs" is employed by litigants and courts alike in reference to a wide variety of expenditures. In California, as in most American jurisdictions, the prevailing party in litigation is not entitled to recover its expenses incurred in prosecuting or defending an action, except as specifically provided by statute (See generally, Miller v. Honda Motor Co. (1986) 184 Cal.App.3d 1014, 1018 [229 Cal.Rptr. 523].). We refer to these expenses as "recoverable costs."
At issue was whether $26.6 million incurred as site investigation costs was actually incurred in defense of the third party actions and therefore recoverable from the insurers, or whether it was properly characterized as indemnity and subsumed within the phase II verdict that Aerojet did not have indemnity coverage for the pollution at its Sacramento site.
Aerojet claims as defense costs those expenses associated with determining the scope of the groundwater problem and evaluating the feasibility of alternative cleanup measures. These costs include drilling and constructing 1,400 groundwater monitoring wells, soil sampling and analysis, geological support and hydrogeological studies. Aerojet does not claim a right to recover the cost of designing, constructing or operating the groundwater extraction facilities and cleaning the groundwater so extracted, because it concedes these expenses are remedial, and constitute indemnification.
Aerojet argues that the duty to defend necessarily encompasses the duty to investigate, and therefore the site investigation costs are properly characterized as part of the defense costs. (See, e.g., Columbia Southern Chemical Corp. v. Manufacturers & Wholesalers Indemn. Exch. (1961) 190 Cal.App.2d 194, 205 [11 Cal.Rptr. 762] (Columbia); Pacific Indem. Co. v. Universal etc. Ins. Co. (1965) 232 Cal.App.2d 541, 543-544 [43 Cal.Rptr. 26] [duty to defend includes duty to investigate]; see generally 7C Appleman, Insurance Law and Practice (Berdal ed. 1979) section 4691, p. 264; 14 Couch on Insurance (2d ed. 1982) section 51:65, p. 547.) In Aerojet's words: "Before one can defend, it must investigate to determine whether plaintiff's claim is good, bad, or sufficiently uncertain as to deserve settlement." Aerojet stresses that the information gathered from the site investigation was used to defend the company in the actions filed by private parties near Aerojet's facility, and to respond effectively to the suits brought by the state and federal governments.
After Aerojet tried and won a representative test case, the private lawsuits brought by 70 litigants were settled for approximately $450,000.
The insurers make the same argument in reverse-that a cleanup cannot proceed until the contamination is investigated, and therefore Aerojet's site investigation expenses are remedial in nature, and within the indemnity coverage which the jury found inapplicable here. However, Aerojet responds that a primary purpose of its extensive site investigation was to preempt and avoid a government cleanup of the site, which Aerojet would have been obligated to reimburse and which is generally recognized as more expensive than cleanups performed by the responsible party. (See AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 837 [274 Cal.Rptr. 820, 799 P.2d 1253] (AIU); Mich. Millers Mut. Ins. v. Bronson Plat. (1994) 445 Mich. 558 [519 N.W.2d 864, 872] (Bronson); Aetna Cas. and Sur. Co., Inc. v. Pintlar Corp. (9th Cir. 1991) 948 F.2d 1507, 1517 (Pintlar); Babich, Understanding the New Era in Environmental Law (1990) 41 S.C. L.Rev. 733, 760, fn. 118 (Babich); Reilly, Minimizing Your Company's Superfund Liabilities, in Practical Approaches to Reduce Environmental Cleanup Costs (1988) 317 PLI Real Estate 333, 336 (Reilly); Lieshout, Superfund Environmental Cleanup (June 1989) 62 Wis. Law. 15 (Lieshout).)
Over Aerojet's objection the court gave the jury the following instruction, which Aerojet challenges as a directed verdict for the insurers on this issue: "In this phase of the trial Aerojet seeks the costs that it incurred to investigate the pollution at the Sacramento site as [a] cost of defending the litigation filed against them by the government and others. [¶] All sums which Aerojet paid, one, because of government orders or request[s] to investigate, cleanup or remediate, or two, because Aerojet's agreement to commit [sic] or commitment to perform the investigation, cleanup or remediation, are indemnity expenses and, therefore, not recoverable as defense costs. [¶] Investigation costs, such as investigating the extent of the contamination, or the viability of cleanup options, and monitoring the spread of waste from the site, which were incurred as part of Aerojet's efforts to clean up or remediate the site, are not considered defense costs. [¶] 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 government to limit Aerojet's obligation to clean up or to remediate. [¶] If any investigation cost did not relate to any of the purposes described above, but were incurred because they were specifically requested by a lawyer and were reasonable for the purpose of defending ... Aerojet in litigation, such investigation costs could be defense costs." (Italics added.)
The trial court rejected a written offer of proof by Aerojet that at least a portion of its site investigation costs were expended to assist its counsel in defending the private third party actions, in which it was successful, and in defending against both liability and the extent of the damage claimed in the governmental actions. Aerojet offered to prove that "a proper defense by a prudent attorney required investigations to determine to what extent, if any, Aerojet's activities were responsible for alleged degradation of groundwaters, whether or not there were chemicals in the groundwaters and, if so, whether they were sufficient to cause contamination or pollution, where such chemicals came from, how they came there, where they were going." After initial negotiations with state and federal officials, Aerojet concluded that: (1) "the best defense ... was to try to obtain a favorable disposition by settlement"; and (2) "the government cases could not be properly defended even through the medium of settlement unless Aerojet could show that groundwaters could be cleaned of chemicals effectively in a cost-effective way." In short, Aerojet believed it would ultimately be held liable for the cost of cleaning up the pollution, and therefore directed its efforts toward mitigating its damages.
However, Moses Lasky, Aerojet's lead counsel, appeared as a witness during phase III and testified in accordance with the offer of proof. In response to a line of questioning fashioned within the disputed instruction, he admitted that all sums expended by Aerojet as site investigation costs were incurred (1) because of government orders or requests to investigate, cleanup, or remediate; or (2) because of Aerojet's agreement or commitment to perform the investigation, cleanup, or remediation. Lasky confirmed that the site investigation costs in dispute were incurred to investigate the extent of the contamination, explore the viability of cleanup options, and monitor the spread of waste from the site. However, it was Aerojet's position below and now on appeal that its site investigation costs were designed in large part to mitigate its damages, an obligation it contends is encompassed within the insurers' duty to defend.
The government orders or requests to which Lasky referred in his testimony derived from lawsuits initiated by the state and federal governments. In 1979 the Central Valley Regional Water Quality Control Board (RWQCB) issued cleanup and abatement orders against Aerojet, ordering it to "[c]leanup forthwith polluted groundwater and toxic or hazardous earth" and to "[r]emove forthwith all wastewater and contaminated soil." Also in 1979, the State of California sought injunctive relief based primarily on the Porter-Cologne Act to prevent Aerojet's further discharge of hazardous substances into the soil and groundwater and to compel cleanup of site contamination. Later, in 1986, the United States Department of Justice, at the request of the United States Environmental Protection Agency (EPA), filed its CERCLA complaint seeking injunctive relief to abate the contamination at Aerojet's site. The same day the federal lawsuit was filed, the State of California filed a similar CERCLA complaint, which was eventually consolidated with the federal action.
-221. A description of the government litigation is contained in our prior opinion, Aerojet-General Corp. v. Superior Court, supra, 211 Cal.App.3d at pages 220
According to the parties, none of the governmental lawsuits filed against Aerojet have been litigated in a traditional manner-no discovery has been scheduled, no court hearings held, and no trial dates set. Aerojet does not contest its liability in the underlying governmental claims. Instead, from the beginning it has cooperated and negotiated with the various governmental units and engaged in its own cleanup activities to avoid litigation, to avert a government cleanup of the site, and to control and mitigate the site investigation and cleanup costs. As Lasky explained to the jury, Aerojet's strategy from the outset was to "satisfy the needs of the government to get things cleaned up and satisfy the needs of Aerojet, that the burden not be too great."
In June 1989 Aerojet entered into a "partial" consent decree with the state and federal governments. Under the terms of the consent decree Aerojet is responsible for an ongoing remedial investigation of the site and for the restoration of the groundwater.
The argument that the insurers made to the jury in Phase III was that the site investigation costs claimed by Aerojet as defense costs were actually damages in the nature of remediation, as governed by CERCLA and analogous state cleanup statutes. (See, e.g., Wat. Code, section 13304; Health & Saf. Code, section 25356.1.) The insurers were aided substantially in this endeavor by the challenged instruction.
In the normal course of defending a liability claim, defense costs include all expenses reasonable and necessary to protect the insured against the claim. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 280 [54 Cal.Rptr. 104, 419 P.2d 168]; Continental Cas. Co. v. Zurich Ins. Co. (1961) 57 Cal.2d 27, 37 [17 Cal.Rptr. 12, 366 P.2d 455]; United Pacific Ins. Co. v. Hall (1988) 199 Cal.App.3d 551, 557 [245 Cal.Rptr. 99].) Such expenses include hiring competent counsel and providing sufficient funds to conduct the defense (Lesher, supra, 187 Cal.App.3d at p. 191), and retaining investigators and experts when necessary. (See, e.g., Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 882 [110 Cal.Rptr. 511].) "To the extent that policy language is ambiguous in light of the way environmental statutes authorize relief, [the court's] goal remains to protect the objectively reasonable expectations of the insured. [Citation.]" (AIU, supra, 51 Cal.3d at p. 828.) Defending an action includes not only defending against liability, but against damages as well, and to this end an insurer is required to " 'keep abreast of the progress and status of the litigation in order that it may act intelligently and in good faith on settlement offers.' [Citation.] Other duties and obligations may attach if 'necessary to assure the provision to [insured] of a proper defense by the insurer.' [Citation.]" (Lesher, supra, 187 Cal.App.3d at p. 191), including the duty "at times to negotiate and make settlements." (Columbia, supra, 190 Cal.App.2d at p. 205.)
We find no authority for carving out an exception for environmental claims from these well-established principles even though, as the insurers emphasize, the site investigation in this case took place in the context of environmental cleanup legislation where there is essentially strict liability. [4] Even if liability is easily established, the defense duty encompasses investigative efforts to limit the amount of damages which may be imposed on the insured. (See, e.g., Fireman's Fund Ins. Co. v. Ex-Cell-O Corp. (E.D.Mich. 1992) 790 F.Supp. 1318, 1338 (Ex-Cell-O I); Oscar W. Larson Co. v. United Capitol Ins. Co. (W.D.Mich. 1993) 845 F.Supp. 458, 461.)
This is easily seen by using the more familiar example of products liability actions based on strict liability in tort. If a defendant manufacturer in a products liability case examines the nature and scope of the claim, medically examines the injured party or performs expert analysis of the damaged property, and/or probes and tests less costly means of ameliorating the injury or damage, such activity is logically seen as part of the defense effort. Similarly, in an environmental contamination case it has been recognized that a reasonable defense, even for a clearly liable party, requires those investigative studies necessary "to limit the damages imposed upon that party or the scope of corrective measures that need to be undertaken by that party." (Fireman's Fund Ins. Companies v. Ex-Cell-O Corp. (E.D.Mich. 1992) 790 F.Supp. 1339, 1345 (Ex-Cell-O II); Intel Corp. v. Hartford Acc. and Indem. Co. (N.D.Cal. 1988) 692 F.Supp. 1171, 1183 (Intel); General Acc. Inc. Co. v. State Dept. of Environ. (1996) 143 N.J. 462 [672 A.2d 1154, 1162-1163] (General Acc.).)
The insurers argue that because Aerojet was subject to strict liability in the government litigation, there was virtually no defense, and therefore "Aerojet's site investigation could not have supported any defense to the actions, ...." This argument limits its focus to liability, and overlooks the fact that defending against damages is equally important from the perspective of the insured.
There are different methods of resolving groundwater contamination problems, each carrying a different price tag. It is generally recognized that the cost of government conducted site investigations and cleanups are substantially greater than those performed by the responsible party. (See, e.g., AIU, supra, 51 Cal.3d at p. 837; Bronson, supra, 519 N.W.2d at p. 872; Intel, supra, 692 F.Supp. at p. 1183; Babich, supra, 41 S.C. L.Rev. at p. 760, fn. 118; Reilly, supra, 317 PLI Real Estate 333; Lieshout, supra, 62 Wis. Law. 15.) Therefore, if an insured who has been identified as a polluter by government officials does not actively participate in discussions with the government regarding cleanup operations and present information on its own behalf concerning the most economically and environmentally appropriate way to proceed, costly decisions may be made without the opportunity to provide any input. In such a case the insurers' duty to provide its insured with a defense does not stop at simply providing a legal representative for the insured to show up at the bargaining table. The duty to defend should logically extend to any reasonable and necessary expenses of investigating the conditions at the site with an eye toward minimizing the insured's ultimate exposure for cleanup costs. (See, Lesher, supra, 187 Cal.App.3d at p. 191; Columbia, supra, 190 Cal.App.2d at p. 205.)
During phase III, Lasky testified he "was of the conviction the best defense was to try to get a favorable settlement, and you couldn't get a favorable settlement unless you were able to present to the people on the other side that [t]here was a method of ... remediating and cleaning up the groundwater which was effective and should satisfy their purposes and which, at the same time, was cost effective and not imposing too great a burden on Aerojet."
We see nothing in AIU, the case on which the challenged instruction is based, that requires a different conclusion. The insured in AIU, who had allowed hazardous wastes to contaminate groundwater, was ordered to reimburse the government for its cleanup and response costs under CERCLA. One of the questions before the court was whether the government's suit for reimbursement of cleanup costs was an action for "damages" within the meaning of a CGL policy. (51 Cal.3d at p. 828.) In answering this question in the affirmative, AIU pointed out that the agencies' expenditures "investigating the extent of contamination or the viability of cleanup options, and monitoring the spread of waste from the site" was a "compensable loss" which, subject to other terms and conditions, may fall within the scope of the insurers' indemnity obligations. (Id. at p. 829-830, italics added.)
When the quoted material is considered in context, AIU simply held that the term "damages" as used in CGL policies should be interpreted to encompass reimbursement of the agencies' out-of-pocket costs of investigation, monitoring, and initiation of cleanup to the extent that these may fairly be said to be restorative costs for repairing the damaged property. (51 Cal.3d at p. 830.) AIU does not discuss the manner in which reasonable and necessary investigative expenses are to be determined when the policyholder incurs investigative costs of its own as part of preparing a defense to a private or governmental claim. We have concluded that, whatever the theory underlying the obligation, principles of law relative to the duty to defend and basic fairness demand that the insured be given the opportunity to prove whether such expenses are reasonable and necessary in defense of the third party claims.
"Instructional error in a civil case is prejudicial 'where it seems probable' that the error 'prejudicially affected the verdict.' [Citations.] ... [T]hat determination depends heavily on the particular nature of the error, including its natural and probable effect on a party's ability to place his full case before the jury." (Soule v. General Motors Corp. (1994) 8 Cal.4th 548, 580 [34 Cal.Rptr.2d 607, 882 P.2d 298] (Soule).) In the present case, the most common formulation of recoverable investigative expenses encompassed by the duty to defend-those expenses that are reasonable and necessary to defend the insured-is absent from the challenged instruction. Consequently, in trying phase III there was no need to focus on the role site investigation information might have played in defending and successfully settling the lawsuits brought by the private parties, in negotiating with the government in an effort to narrow the government's demands, in lessening Aerojet's exposure for the site cleanup, and in eventually entering into a favorable settlement with the state and federal governments. It was enough for the insurers to show that the site investigation could somehow be tied to a bureaucratic request, a government order, or Aerojet's agreement or commitment to investigate, since the jury was instructed to assume that such an investigative cost was not a reasonable and necessary defense expenditure.
Included within the challenged instruction was the statement that if an investigation cost fell within the guidelines provided by the instruction and was "specifically requested by a lawyer," such cost could be considered a legitimate defense cost recoverable from the insurers. This caveat made a bad instruction worse. First, it incorporates the requirements of the rest of the instruction, thereby suffering from the same deficiencies. Second, it is an incorrect statement of law. There is no requirement that a legitimate defense expenditure must be ordered specifically by an attorney, especially in a case such as this one where highly technical data, well within the knowledge and expertise of the insured, was utilized. After examining the "evidence, the arguments, and other factors to determine whether it is reasonably probable that instructions allowing application of an erroneous theory actually misled the jury" (Soule, supra, 8 Cal.4th at p. 581, fn. 11, italics original), our evaluation convinces us that the erroneous instruction given in phase III is prejudicial.
At the center of this controversy is the issue which will have to be decided under different legal standards upon remand-whether any portion of Aerojet's site investigation costs are recoverable from the insurers as reasonable and necessary defense costs. For the few courts that have confronted it, this issue has proven extremely difficult and elusive of a consistent solution. The difficulty of resolution lies in the fact that the site investigation is often an integral part of executing and monitoring the cleanup, which Aerojet concedes is remedial, in the nature of indemnification, and for which the insurers are not liable under the phase II verdict.
A limited number of cases from other jurisdictions address the appropriate classification-defense or indemnity-which should be ascribed to the costs associated with investigating a contaminated site, but to date no consistent approach has been adopted. (See, e.g., General Acc., supra, 672 A.2d 1154; State of N.Y. v. Blank (N.D.N.Y. 1990) 745 F.Supp. 841, 852; Gelman Sciences v. Fireman's Fund Ins. (1990) 183 Mich.App. 445 [455 N.W.2d 328, 330]; Ex-Cell-O I, supra, 790 F.Supp. at pp. 1334-1338; Ex-Cell-O II, supra, 790 F.Supp. at pp. 1344-1346; Hi-Mill Mfg. Co. v. Aetna Cas. & Sur. Co., (E.D.Mich 1995) 884 F.Supp. 1109, 1116-1117 (Hi-Mill).)
The other side of that coin is the fact that site investigation information can be critical to the defense effort to define, limit and mitigate the polluter's exposure to cleanup costs and other damages, an effort encompassed within the duty to defend. The difficulty comes in establishing legal standards to distinguish between the two. Those standards are complicated by the fact that the site investigation often has dual utility-both to the defense of the action and to meeting a government-imposed obligation that is geared toward remediation. Such is the case here. Aerojet contends the disputed investigative costs were necessary to the defense of the private third party actions and to reduce its damage liability in the governmental cleanup litigation.
Aerojet should be given the opportunity to show which site investigation costs were reasonable and necessary in conducting its defense. However, the fact that Aerojet may be entitled to some of its site investigation expenses as defense costs still has to be analyzed within the framework of the litigation pending when the investigation was undertaken, which falls into three discrete areas: (1) the state and federal CERCLA actions; (2) the state action and administrative proceedings; and (3) the private party lawsuits for damages.
Aerojet offered to prove that "a proper defense by a prudent attorney required investigations to determine to what extent, if any, Aerojet's activities were responsible for alleged degradation of groundwaters, whether or not there were chemicals in the groundwaters and, if so, whether they were sufficient to cause contamination or pollution, where such chemicals came from, how they came there, where they were going."
1. 1986 CERCLA Actions
In 1986 the state and federal governments filed CERCLA actions against Aerojet. CERCLA establishes virtually strict liability for present and former owners of hazardous waste disposal sites. (42 U.S.C. section 9607(a) & (b).) The only liability defenses to a CERCLA action are "(1) an act of God; (2) an act of war; (3) an act or omission of a third party ...." (42 U.S.C. section 9607(b).) Under CERCLA, the EPA identifies sites contaminated with hazardous materials and identifies the "potentially responsible parties" (PRP's) for the contamination. (42 U.S.C. sections 9601-9625.) The EPA may obtain an injunction to compel the PRP's to clean up the site, or it may conduct the cleanup itself and then sue the polluters for reimbursement. (42 U.S.C. sections 9604, 9606 & 9607.) However, the EPA's general practice has been to encourage the voluntary cleanup of the contaminated sites by the entities responsible for the pollution. (Aerojet-General Corp. v. Superior Court, supra, 211 Cal.App.3d at pp. 221-222; see generally, Note, Superfund Settlements: The Failed Promise of the 1986 Amendments (1988) 74 Va. L.Rev. 123.)
Under CERCLA, the EPA can coerce a PRP to perform an investigation in order to determine the nature and extent of environmental problems posed by the contamination, and to develop a plan for its remediation-the remedial investigation/feasibility study (RI/FS). (See 42 U.S.C. section 9604(a) (1); see also 40 C.F.R. section 300.430 (1994).) This government-mandated investigative process may include the monitoring and sampling of air, water and soil and the compilation of sufficient data to determine the necessity for, and the proposed extent of, any action required to remedy existing contamination. (See generally, 40 C.F.R. section 300.430(d) (2) (1994); General Elec. Co. v. Litton Business Systems, Inc. (W.D.Mo. 1989) 715 F.Supp. 949, 961-962.)
For easy reference, we cite the current version of the regulations, since it fairly reflects the substance of the prior regulations covering the same subject matter. (See Versatile Metals, Inc. v. Union Corp. (E.D.Pa. 1988) 693 F.Supp. 1563, 1579-1581.)
If the PRP does not conduct the RI/FS itself, the EPA can do so. If it does, the PRP can be held liable for all costs associated with the removal or remedial action, including investigation, planning and enforcement. (42 U.S.C. section 9607(a).) The purpose of the RI/FS is to assess the contaminated site and "evaluate alternatives to the extent necessary to select a remedy." (40 C.F.R. section 300.430 (a) (2) (1994).) The RI/FS requires detailed and specific studies, sampling and analysis, all of which must be approved by the EPA before any cleanup or remedial work is undertaken. (For a detailed analysis of the RI/FS see Artesian Water Co. v. Gov. of New Castle County (D.Del. 1987) 659 F.Supp. 1269, 1294-1295.) The RI/FS cannot be conducted by the polluter itself without the government's express authorization and oversight. "No remedial investigation or feasibility study (RI/FS) shall be authorized except on a determination by the President [of the United States] that the party is qualified to conduct the RI/FS and only if the President contracts with or arranges for a qualified person to assist the President in overseeing and reviewing the conduct of such RI/FS and if the responsible party agrees to reimburse the Fund for any cost incurred by the President under, or in connection with, the oversight contract or arrangement." (42 U.S.C. section 9604 (a) (1) (B).)
The functions vested in the President under CERCLA and SARA are delegable under 42 United States Code section 9615.
In June 1989, Aerojet entered into a "partial consent decree" with the state and federal governments. Under the terms of the consent decree, Aerojet is responsible for conducting the RI/FS and, ultimately, the restoration of the groundwater.
Aerojet claims that all costs associated with the RI/FS must be classified as defense costs. We disagree. Unlike a normal tort action where the defense investigation is under the defendant's exclusive direction and control, the RI/FS may be conducted by the defendant, but only with the government's approval, and the governmental plaintiff has the absolute rights of planning, direction and control. In addition, the cost of the RI/FS, which is designed to aid the plaintiff, must be borne by the defendant.
There may be some question whether states can enforce the CERCLA RI/FS (see State of Ariz. v. Components Inc. (9th Cir. 1995) 66 F.3d 213, 216; Razore v. Tulalip Tribes of Washington (9th Cir. 1995) 66 F.3d 236, 239), but since the state and federal actions paralleled each other, that issue is not present here.
In significant respects, we believe the approach taken by the court in Ex-Cell-O I provides the proper guidance for categorization of Aerojet's site investigation expenses. In Ex-Cell-O I, as in our case, the insurers had no duty to indemnify the policyholders, but the court had to determine whether any of the policyholder's site investigation costs could be passed along to the insurers as defense costs. Although the court deferred a final decision on the issue pending a complete record, it did conclude that certain categories of site investigation costs qualified as defense costs-specifically, investigation costs reasonable and necessary "to defeat or limit liability," and investigation costs "reasonable and necessary to limiting the scope and/or costs of remediation." (790 F.Supp. at p. 1338.) Within the rubric of these categories, if the government specifically requested or ordered certain information about the polluted site, a "prima facie" case was established that the expense of providing the information was part of the cleanup and not reasonable and necessary to the defense. However, this prima facie case could be rebutted by evidence from the policyholder demonstrating that the site investigation information was reasonable and necessary to its defense and would have been compiled anyway absent the government request or order. (Ibid.)
In the companion case, Ex-Cell-O II, the court further explained: "Where the government makes the choice as to which hydrogeological studies are undertaken, not the attorneys, the policyholders need more to make out their proofs that these tests were defense costs. Stating that these types of tests are often selected by defense counsel, or asserting hypothetically that defense counsel would have chosen such a test if the government had not, are weaker proofs than the actual past choices of defense counsel." (790 F.Supp. at p. 1346, fn. 6, italics original.)
Aerojet argues that the results of the RI/FS have a dual use, in that they may have helped it limit the scope or cost of remediation. The court in Ex-Cell-O I considered the same argument and resolved it as we do, by ruling that if the government requested or ordered certain information about the polluted site, a "prima facie" case was established that the expense of providing the information was part of the cleanup and not a defense cost. However, this prima facie case could be rebutted by evidence from the insured demonstrating that the site investigation was reasonable and necessary to its defense and would have been conducted in any event even if there were no governmental request or order. (790 F.Supp. at p. 1338.)
We do not agree with the insurers' argument that because Aerojet agreed to perform the RI/FS as part of the negotiated "partial consent decree," that its investigatory expenses from this point on should be purely a matter of indemnity. Although the Ex-Cell-O approach imposes some restraints on Aerojet's ability to recover site investigation costs incurred in fulfilling its obligation to conduct the RI/FS under the "partial consent decree," we believe that it would be unfair to automatically label all costs associated with conducting the RI/FS as nonrecoverable damages.
Numerous authorities substantiate Aerojet's claim that "the RI/FS process may be the only way in which the private party can obtain the information necessary to be exculpated, or to convince the government to settle for a less expensive remedy (i.e., lesser damages)." For instance, it has been noted that the party who assumes responsibility for the site investigation, such as the RI/FS, is automatically placed in a position "to influence the nature and costs of the environmental studies and cleanup measures." (Pintlar, supra, 948 F.2d at p. 1517; see also Bronson, supra, 519 N.W.2d. at p. 872; Barmet Aluminum Corp. v. Reilly (6th Cir. 1991) 927 F.2d 289, 296 [control of RI/FS "... presents parties with an opportunity to reduce their potential liability"]; Hi-Mill, supra, 884 F.Supp. at p. 1117 [oversight costs of conducting RI/FS attributable to defense when conducted by insured "... for the sole purpose of minimizing or absolving itself of liability"]; Intel, supra, 692 F.Supp. at p. 1183 [control over RI/FS carries the potential of "... keep[ing] cleanup costs to a minimum by urging the adoption of the least-cost alternatives"].) The potential cost-saving benefits of maintaining control over the RI/FS is widely recognized. "[T]he party that conducts the studies [RI/FS] is in a better position to influence the choice of the remedy. For example, in many cases incineration of all wastes and residues is the most expensive alternative. Other remedies, such as bioremediation, can be equally or more effective, and far less costly, but often are viewed with skepticism by the public and sometimes the [Environmental Protection] Agency. A well conducted study showing the efficacy of bioremediation during the RI/FS process can counter this skepticism. Such a study saved the PRP[']s some $100 million at the French Limited Site in Texas." (Reilly, supra, 317 PLI Real Estate at p. 336.)
We have already concluded that the cost of any reasonable and necessary site investigation that Aerojet would have conducted voluntarily in preparation for a defense-in an attempt to defeat liability or limit its damages-falls within the scope of the insurers' defense obligation. The insured's right to recover such expenses should not be forfeited simply because it is undertaken as part of the RI/FS process. (Accord, General Acc., supra, 672 A.2d at pp. 1162-1163.)
2. 1979 State Administrative Proceedings and Lawsuit
In 1979 Lasky was engaged by Aerojet to represent it in Porter-Cologne Act proceedings before the RWQCB. The RWQCB issued cleanup and abatement orders against Aerojet, ordering it, pursuant to Water Code section 13304, to "[c]leanup forthwith polluted groundwater and toxic or hazardous earth" and to "[r]emove forthwith all wastewater and contaminated soil ...." Aerojet initiated administrative mandate proceedings to have these orders vacated.
The Porter-Cologne Act grants the regional water boards broad enforcement powers. The regional water boards may issue cease-and-desist orders and cleanup and abatement orders against any person who discharges or permits the discharge of contaminants into waters of the state or who causes or threatens to cause a condition of pollution or nuisance. Regional water boards may also perform the cleanup and recover cleanup costs from dischargers and may impose liens on affected properties to secure recovery. (Wat. Code, sections 13301, 13304 & 13305.)
In 1979 Lasky, Aerojet's corporate counsel and an Aerojet executive met with the California Attorney General. At that meeting, Aerojet was asked and agreed to perform an investigation to determine the extent, if any, it was responsible for the alleged degradation of groundwaters and what could be done by way of cleanup and abatement. The parties agreed to meet again to discuss settlement once the results of this investigation were known.
As anticipated, on December 26, 1979, the State of California filed suit alleging causes of action under the Water Code (sections 13002, subd. (c), 13304 & 13350) and the Health and Safety Code (former section 25190 [added by Stats. 1977, ch. 1039, section 31.2, p. 3150, and repealed by Stats. 1988, ch. 876, section 3, p. 2749, eff. Sept. 10, 1980, now section 25189.5] & section 25189). Among other things, this suit sought to prevent Aerojet from further discharging hazardous substances into the soil and groundwater; recovery of response costs incurred by the state; and cleanup of the contamination.
Aerojet and the state stipulated to consolidate Aerojet's administrative challenge to the RWQCB orders with its defense in the state's lawsuit. Aerojet believed that its administrative appeal, coupled with the stipulation, rendered the RWQCB's cleanup orders a legal nullity.
The 1979 state administrative proceedings and litigation against Aerojet predated the enactment of CERCLA and were the only governmental action pending against Aerojet until 1986, when the federal CERCLA action was initiated. We have received supplemental briefing on the state's authority, as it existed when the state action was filed against Aerojet, to require Aerojet to investigate the nature and scope of environmental pollution for which it allegedly was responsible.
The briefing has revealed no express legislative authorization for regional water boards to order private parties to conduct site investigations during the time in question. Unlike the federal CERCLA statutory and regulatory authority (set out at length in pt. III.A.1. entitled "1986 CERCLA Actions," ante), there were no state statutory or administrative standards for site investigations during the periods in dispute here. No statutory or case authority has been brought to our attention authorizing site investigation costs to be recovered if conducted by the state. The cleanup and abatement directives issued to Aerojet contain no reference to any site investigation. The orders simply demand that Aerojet remove all chemical wastes from the groundwater and soil.
At the time the state action was filed against Aerojet, the Porter-Cologne Act did not dictate the precise manner in which compliance could be achieved with a cleanup directive. (See Wat. Code, section 13360; Tahoe-Sierra Preservation Council v. State Water Resources Control Bd. (1989) 210 Cal.App.3d 1421, 1438 [259 Cal.Rptr. 132]; People ex rel. Cal. Regional Wat. Quality Control Bd. v. Barry (1987) 194 Cal.App.3d 158, 180-181 [239 Cal.Rptr. 349].) Obviously, costs can be catastrophic if the polluter must clean up to background or pristine levels. This was admitted by a former deputy attorney general who testified during phase III that "[T]he standards for hazardous pollutants are arbitrary and regulators can spend millions to clean up substances that are not a threat to health."
Significantly, the language of the Porter-Cologne Act and a 1968 resolution of the California State Water Resources Control Board (State Board) allow the polluter to demonstrate that some level of contamination can remain in the water without affecting beneficial uses. In general, State Board Resolution No. 68-16 (Oct. 28, 1968) allows a change to existing high water quality only when "it has been demonstrated to the [s]tate that any change will be consistent with maximum benefit to the people of the [s]tate, will not unreasonably affect present and anticipated beneficial use of such water and will not result in water quality less than that prescribed in the policies." Water Code section 13241, as it existed in 1979 (Stats. 1969, ch. 482, section 18, p. 1061), allowed water quality objectives "to be changed to some degree" depending on several factors, including "past, present, and probable future beneficial use of water," "environmental characteristics of the hydrographic unit under consideration" and "economic considerations."
As it read in 1979, the Porter-Cologne Act urged water quality objectives that "will ensure the reasonable protection of beneficial uses and the prevention of nuisance." However, it was "recognized that it may be possible for the quality of water to be changed to some degree without unreasonably affecting beneficial uses." (Wat. Code, section 13241; Stats. 1969, ch. 482, section 18, p. 1061.)
On October 28, 1968, the State Board adopted Resolution No. 68-16, the "Statement of Policy with Respect to Maintaining High Quality of Waters in California," as a part of state policy for water quality control. Because Resolution No. 68-16 is an existing state water quality policy, it is enforceable under Water Code section 13301.
In light of these standards, Aerojet claims it "did not simply accede to the demands made by the state authorities. Faced with the very real risk that it could be compelled to cleanup to background levels at enormous cost, Aerojet initiated an investigation as a part of its vigorous development and advancement of its defenses in seeking to minimize its potential damages." Given the discretion imposed on state authorities in determining what level of cleanup would protect water quality and the absence of investigative orders and promulgated investigative standards, Aerojet should have some latitude in showing that its site investigation expenses were reasonable and necessary in defending the state action. Legitimate categories of defense expenditures include, but are not limited to, site investigation expenses that can be shown to be reasonable and necessary to Aerojet's efforts to convince state authorities that a cleanup to background levels was unreasonable and that a less stringent cleanup level would adequately protect beneficial uses.
3. The Private Party Lawsuits
Commencing in 1979 Aerojet was sued by approximately 70 private parties advancing claims for personal injuries and property damage. Three of the private actions were consolidated and tried as a test case over a three-month period in 1986. The jury returned a verdict for Aerojet, and the remaining cases were settled, as we previously stated. Because the private party actions were nonremedial in the CERCLA context, Aerojet should be allowed to recover all expenses which were reasonable and necessary in defending and achieving a favorable resolution of the litigation brought by the private parties.
Absent a full trial record on the nature and extent of the various investigative costs, we cannot formulate a detailed instruction should the matter be retried. However, the components of such an instruction should include the "reasonable and necessary" analysis for the non-RI/FS costs, and the Ex-Cell-O formula for the government mandated RI/FS.
B. Apportionment of Defense Costs
Aerojet challenges the trial court's decision to allocate a portion of the liability for defense costs to Aerojet itself because some of the primary liability policies implicated by the third party claims provide that Aerojet will bear its own costs of defense. The facts with regard to this issue are essentially undisputed. Aerojet had "cash flow" primary policies issued by Insurance Company of North America (INA) with $1 million limits for eight of the approximately thirty years for which Aerojet claims coverage in this case, July 15, 1976, through May 1, 1984. These INA policies contain endorsements which provide that Aerojet will pay its own legal defense fees and costs. The pertinent language in these policies provides that INA "has no obligation to pay or contribute to any 'Loss Adjustment Expense.' Rather, the Named Insured [Aerojet] shall pay all such expenses." "Loss Adjustment Expense" is defined to include "[a]ttorney's fees for claims in suit" and "[c]ourt costs and other expenses in connection with investigation." Aerojet's former risk manager, who had principal authority for the purchase of insurance, testified it was understood that under this policy language Aerojet would be responsible for all defense costs for claims under the INA policies.
The primary insurers agreed among themselves to share the costs of defense equally. The trial court ruled that Aerojet "is responsible for a [coequal] allocation of the defense cost." Aerojet does not challenge the manner in which the defense costs were allocated. It simply asserts it has no responsibility for any costs of defense. Consequently, the manner of allocation is not before us, except as to whether Aerojet itself should be included in the formula. Under the circumstances of this case we will affirm the judgment allocating a portion of the defense costs to Aerojet.
Aerojet contends the fact that it chose not to purchase coverage for defense costs during certain periods should not deprive it of the complete defense protection it purchased under other policies. It relies on cases holding that an insured is covered up to the policy limits for the full extent of its liability and need not pay a pro rata share for periods it was uninsured. For example, it cites Keene Corp. v. Ins. Co. of North America (D.C. Cir. 1981) 667 F.2d 1034, 1047-1049 [215 U.S.App.D.C. 156], wherein the court emphasized that an insurer is required to pay its policyholder's full legal liability once a policy is triggered, and the insurer's liability should not be reduced because the insured did not have full coverage for certain periods. (See also Owens-Illinois, Inc. v. Aetna Cas. and Sur. Co. (D.C. 1984) 597 F.Supp. 1515, 1527; Lac D'Amiante Du Quebec v. Am. Home Assur. (D.C.N.J. 1985) 613 F.Supp. 1549, 1562-63 (Lac D'Amiante); ACandS, Inc. v. Aetna Cas. and Sur. Co. (3d Cir. 1985) 764 F.2d 968, 974.)
The insurers rely on a line of cases holding that the insured must bear a pro rata share of the cost of defense for periods during which the insured carried no insurance. (See, e.g., Owens-Illinois, Inc. v. United Ins. Co. (1994) 138 N.J. 437 [650 A.2d 974, 995] (Owens-Illinois); Gulf Chemical & Metallurgical v. Associated Metals (5th Cir. 1993) 1 F.3d 365, 371-372 (Gulf Chemical); Ins. Co. of N. A. v. Forty-Eight Insulations (6th Cir. 1980) 633 F.2d 1212, 1224-1225, clarified Ins. Co. North America v. Forty-Eight Insulations (6th Cir. 1981) 657 F.2d 814.)
We have received correspondence from both sides citing recent cases on this issue. However, because the cases are not yet final and are factually distinguishable, we do not cite them.
Aerojet's entitlement to a defense from its insurers obviously arises out of its various policies. [9] Insurance policies are contracts of indemnity. (Ins. Code, section 22; Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 663 [42 Cal.Rptr.2d 324, 897 P.2d 1] (Montrose II); Bastian v British American etc. Co. (1904) 143 Cal. 287, 290 [77 P. 63]; Vyn v. Northwest Casualty Co. (1956) 47 Cal.2d 89, 93 [301 P.2d 869] (Vyn).) Although insurance contracts differ in some respects from ordinary commercial contracts, they are governed by the same general rules of construction. (Montrose II, supra, 10 Cal.4th at p. 666; Vyn, supra, 47 Cal.2d at p. 94; Chase v. National Indemnity Co. (1954) 129 Cal.App.2d 853, 858 [278 P.2d 68].) Primary among these rules of construction is the requirement of determining the mutual intent of the parties at the time the contract was formed. (Civ. Code, section 1636; Montrose II, supra, 10 Cal.4th at p. 666.)
We deal here with a case of continual or progressively deteriorating injuries and property damage due to long-term, ongoing toxic contamination. As has been noted by other courts, it is unrealistic to assume that Aerojet, or the insurers responsible for defending it against the private and governmental actions, had any intentions regarding this sort of injury or damage at the time these policies were issued. "At least in the case of property damages due to environmental contamination, the retroactive imposition of absolute liability under laws like CERCLA, [citation], was surely unknown, if not unknowable." (Owens-Illinois, supra, 650 A.2d at p. 991.)
We are also required, to the extent possible, to infer mutual intent from the written language of the policies, applying the usual rules of interpretation. (Montrose II, supra, 10 Cal.4th at pp. 666-667.) The parties have not called our attention to any language in the policies of those insurers responsible for defending Aerojet which implies a mutual intent on the issue of allocation.
However, aside from the lack of evidence of mutual intent of Aerojet and the defending insurers, we have evidence of Aerojet's intent during the years it was only covered by the INA policies. [10] Parties to an insurance contract are generally free to negotiate any terms they choose, so long as they do not violate law or public policy. (Linnastruth v. Mutual Ben. Health etc. Assn. (1943) 22 Cal.2d 216, 218 [137 P.2d 833]; Gillies v. Michigan Millers etc. Ins. Co. (1950) 98 Cal.App.2d 743, 748 [221 P.2d 272].) Aerojet was not an unsophisticated consumer of insurance; it employed a full time risk manager to analyze its insurance needs and negotiate insurance coverage. He testified, and it is undisputed, that for an eight-year period Aerojet made a deliberate business decision to assume its own costs of defense, including investigation and attorneys fees, for any liability claims against it. During that period it knew it had no other liability coverage providing defense costs for claims arising from "occurrences" during this period. Some of the cases which support Aerojet's argument for imposing a joint and several coverage obligation on each insurer are no longer valid. Sandoz, Inc. v. Employer's Liability Assur. Corp. (D.N.J. 1983) 554 F.Supp. 257, 262-263, and Lac D'Amiante, supra, 613 F.Supp. 1549, 1554, were diversity cases in federal court applying what the court deemed to be New Jersey law. However, in Owens-Illinois, supra, 650 A.2d 974, the New Jersey Supreme Court rejected that approach and held that "[w]hen periods of no insurance reflect a decision by an actor to assume or retain a risk, as opposed to periods when coverage for a risk is not available, to expect the risk-bearer to share in the allocation is reasonable." (Id. at p. 995.) J.H. France Refractories v. Allstate (1983) 534 Pa. 29 [626 A.2d 502, 507-508] applied a joint and several liability analysis, and TPLC, Inc. v. United Nat. Ins. Co. (10th Cir. 1995) 44 F.3d 1484, 1493-1495 was another diversity action in federal court which applied Pennsylvania law as announced by J.H. France.
Montrose II rejected a joint and several approach to allocating indemnification losses among insurers, stating: "We do not endorse that aspect of the California Union [Ins. Co. v. Landmark Ins. Co. (1983) 145 Cal.App.3d 462 (193 Cal.Rptr. 461)] court's holding that both insurers in that case were jointly and severally liable for the full amount of damage occurring during the successive policy period. ([Id.] at p. 478) [11] Allocation of the cost of indemnification once several insurers have been found liable to indemnify the insured for all or some portion of a continuing injury or progressively deteriorating property damage requires application of principles of contract law to the express terms and limitations of the various policies of insurance on the risk. [Citations.]" (10 Cal.4th at p. 681, fn. 19, italics original.) California Union Ins. Co. v. Landmark Ins. Co. (1983) 145 Cal.App.3d 462 [193 Cal.Rptr. 461] involved the liability of successive insurers to the owner of a swimming pool which had leaked for more than 18 months, during which time the owner changed insurers. Obviously, our Supreme Court's rejection of joint and several liability where multiple insurers issued successive policies to the insured over the period of time the damage was developing supports allocating contractual responsibilities in multiple coverage situations generally.
In determining what impact Aerojet's self-insured periods should have on its defense entitlements, we consider the scope of the coverage purchased during the insured periods. The policies at issue here all carried similar clauses to those discussed in the allocation cases: (1) "other insurance" clauses; (2) "all sums" clauses; and (3) clauses defining the period of coverage. The "other insurance" clauses here generally state that the insurance provided shall be excess over all such other valid and collectible insurance. The "all sums" clauses typically obligate the insurer to pay on behalf of the insured all sums which the insured is legally obligated to pay as damages because of injury or property damage to which the insurance applies. The clauses defining the period of coverage provide that the insurance applies only to occurrences which happen during the policy period.
1. "Other Insurance" Clauses
"Historically, 'other insurance' clauses were designed to prevent multiple recoveries when more than one policy provided coverage for a given loss. [Citation.]" (Owens-Illinois, supra, 650 A.2d at p. 991.) Aerojet contends that if defense costs are allocated among insurance carriers, presumably pursuant to the "other insurance" clauses, no part can be allocated to the insured, even though the insured made a risk management decision to assume the risk of its own defense for certain periods.
Where a commercial entity, as a matter of business judgment, elects to pay lower premiums to its insurer in exchange for carrying a portion of the risk itself, California courts have shown no hesitation in holding the insured to the consequence of its decision. For example, in Nabisco, Inc. v. Transport Indemnity Co. (1983) 143 Cal.App.3d 831 [192 Cal.Rptr. 207] (Nabisco), the court held that Nabisco's express agreement to be responsible for the first $50,000 of any loss constituted "other insurance or self-insurance" for purposes of a second policy's excess clause and that Nabisco was responsible for defense costs attributable to the extent of its self-insurance. (Id. at pp. 834, 836.) The court explained, "[Nabisco] made a risk management decision not to buy coverage for the first $50,000. To rewrite the Transport policy to require it to defend under these circumstances would only create a serendipitous windfall for Nabisco...." (Id. at p. 836-837, citation and fn. omitted.)
In City of Oxnard v. Twin City Fire Ins. Co. (1995) 37 Cal.App.4th 1072 [44 Cal.Rptr.2d 177] (Oxnard), the City of Oxnard sued two of its insurers for failing to contribute to the costs of defending and settling a claim for environmental harm occurring over a 20-year period. The policies had a self-insured retention for each occurrence of $100,000 and $200,000. The court held the insurers had no duty to defend Oxnard until the self-insured retention limits were exhausted. In rejecting an argument based on Montrose II, the court held that the fact that other policies may be triggered by the third party claim does not allow a self-insured entity to escape its obligations under the insurance contract. "[B]y the very nature of these policies wherein Oxnard agreed to insure itself for certain amounts, it expressly agreed to act as its own primary insurer under those retained limits. [Citation.] By making a risk decision not to buy insurance coverage for the [self-insured retention] amounts, Oxnard cannot seriously claim it had a reasonable expectation of primary coverage. [Citations.]" (37 Cal.App.4th at p. 1077.)
By making its risk decision to forego coverage for defense costs when it purchased indemnity coverage from INA during an eight-year period, Aerojet cannot seriously claim it had an objectively reasonable expectation of coverage for defense costs for occurrences which happened during that same period.
2. "All Sums" Clauses and Clauses Defining Period of Coverage
The "all sums" clauses are related to the clauses defining the period of coverage, since the insurers' obligations are contingent upon occurrences which happen during the policy periods. As we noted previously, premiums are based on exposure to certain risks during a specific period. None of the policies explicitly requires the insurers to indemnify or defend Aerojet for occurrences which happen outside the policy period or during periods when Aerojet had no insurance or was self-insured.
We recognize that in this sort of litigation it is difficult, if not impossible, to isolate discrete "occurrences" to any given policy period. [13] Although " 'the time of the occurrence of an accident within the meaning of an indemnity policy is not the time the wrongful act was committed, but the time when the complaining party was actually damaged' " (Montrose II, supra, 10 Cal.4th at p. 670), we are not dealing with a single instance of pollution which subsequently spread, but a waste disposal system which routinely discharged chemicals to the ground over a period of many years, during which they migrated through the soil to the groundwater and adjacent streams. Following Aerojet's argument to its logical conclusion would permit it to have been fully insured, for example, with Transport Indemnity Company for only 1 year out of the 30 years at issue here, then to have carried the subject INA policies for the remaining 29 years but claim a defense from Transport Indemnity for the entire 30-year period. We think neither the policies nor the objectively reasonable expectations of Aerojet permit such a result. (See also Commercial Union Ins. Co. v. Sepco Corp. (11th Cir. 1985) 765 F.2d 1543, 1544; Budd Co. v. Travelers Indem. Co. (6th Cir. 1987) 820 F.2d 787, 790 [refusal "... to allow the insured to reap the benefits of a free defense when the underlying liability clearly fell outside the scope of the policy coverage"]; Gulf Chemical, supra, 1 F.3d at p. 372 ["... the insured must bear its share of those costs determined by the fraction of the time of injurious exposure in which it lacked coverage"].) The environmental damage which resulted from Aerojet's operations took place over decades. Although Aerojet strenuously contends it was not self-insured for defense costs during the INA years, it is difficult to describe its status during that period in any other fashion. (See, e.g., Nabisco, supra, 143 Cal.App.3d 831; Oxnard, supra, 37 Cal.App.4th 1072.) Those who deliberately assumed the risk of defending against claims during the years at issue, whether they be insurers or insureds, should now carry their fair share of the burden.
Disposition
The judgment in phases I and II is affirmed. The judgment in phase III is affirmed as to the allocation issue; it is reversed and remanded on the instructional issue. Each party shall bear its own costs on appeal.
Peterson, P. J., and King, J., concurred.
In CERCLA litigation, the phrase "response costs" is used to describe, inter alia, the polluter's expense of cleaning up the contamination, which both parties agree constitutes an expenditure or loss normally classified as damages. (See Aerojet-General Corp. v. Superior Court (1989) 211 Cal.App.3d 216, 223-224 [258 Cal.Rptr. 684].)
Insurance law generally requires that an insurer provide all expenses reasonably necessary to defend its insured against a claim potentially covered by the policy, including attorneys fees, investigative costs and other expenses that are not ordinarily recoverable as costs from a losing claimant. (See Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169, 191 [231 Cal.Rptr. 791] (Lesher).) We refer to these expenses as "defense costs."