Barg Coffin Lewis & Trapp, LLP Articles

July 1995

Historic California Supreme Court Decision Favoring Insurance Policyholders

by Jon Enscoe

On July 3, 1995, Comprehensive General Liability (CGL) policyholders won a major victory when the California Supreme Court unanimously ruled in Montrose Chemical Corp. v. Admiral Insurance Co. that every third-party liability insurance policy in effect when property damage or bodily injury occurs must potentially provide coverage. In the opinion written by Chief Justice Malcolm M. Lucas, the court adopted a "continuous trigger of coverage" rule, holding that in cases of bodily injury and property damage that is continuous or progressively deteriorating throughout successive policy periods, all policies in effect during those periods may potentially be required to provide the policyholder a defense and indemnification.

The Underlying Lawsuits

The Montrose case involved an effort by Montrose Chemical Corp., a now defunct chemical company that previously manufactured DDT, to obtain insurance coverage for a number of underlying lawsuits, including two arising out of Montrose's disposal of toxic wastes at the Stringfellow Acid Pits in Riverside County. Montrose had been sued both by the United States and the State of California on a strict liability theory under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) for generating toxic wastes shipped to the Stringfellow site, and by various individuals asserting bodily injury and property damage allegedly resulting from the release of contaminants at the Stringfellow site. All of the lawsuits involved allegations of damage or injuries which began as early as the 1950s and continued until the 1980s.

Montrose tendered the defense of these and other actions to all of its CGL carriers that had issued policies from 1960 to 1986. All carriers except defendant Admiral Insurance Co. agreed to defend subject to a reservation of rights to contest their obligations to provide indemnity. Admiral had issued policies to Montrose for the 1982-86 period. Admiral refused to defend or indemnify Montrose on the grounds that the alleged damage had already occurred and was known to Montrose prior to the effective date of the first policy issued by Admiral.

"Trigger of Coverage" Issue

The court in Montrose addressed what was arguably California's most important unresolved issue of insurance law affecting environmental claims – the "trigger of coverage." The court explained that the word "trigger" is not found in CGL policies or in the Insurance Code. Instead, it is a term of convenience "used to describe that which . . . must happen in the policy period for the potential of coverage to arise."

The California Supreme Court in Montrose found that the express language of the CGL policies unambiguously requires the adoption of the "continuous injury" trigger of coverage rule most favored by policyholders. The court held that where "successive CGL policies are implicated, bodily injury and property damage which is continuous or progressively deteriorating throughout several policy periods is potentially covered by all policies in effect during those policy periods." The court stated that whether the damages and injuries alleged were in fact "continuous" is a matter for final determination by the trier of fact. However, because there was a potential for coverage, the court held that Admiral had a duty to defend Montrose in all of the underlying lawsuits. The court sent the action back to the trial court for a determination of whether Admiral also had a duty to indemnify Montrose for its liability in the underlying lawsuits.

In ruling that Admiral had a duty to defend and possibly indemnify Montrose because the damage may have continued to occur during Admiral's policy period, the court expressly rejected the "manifestation trigger of coverage" rule favored by most insurers and previously adopted by certain intermediate California appellate courts. Under the manifestation rule, coverage is limited to the policy in effect when the damage or injury is discovered, or manifests. Insurers have favored the manifestation rule because it typically limits coverage to a single year and to more recent policies containing broad pollution exclusions that may allow an insurer to avoid coverage.

The "Known Loss" Issue

The court also rejected Admiral's argument that the "known loss" rule barred coverage. As the court noted, under California Insurance Code sections 22 and 250, where a loss is "known or apparent" before a policy of insurance is issued, there is no coverage. Admiral's "known loss" argument was based on the fact that prior to the commencement of the first Admiral policy, Montrose had been notified by the U.S. Environmental Protection Agency that it was a potentially responsible party at the Stringfellow site. Admiral argued that once Montrose had knowledge that damage had occurred, it could not obtain insurance coverage for such "known" damage.

In rejecting Admiral's argument, the court stated that while it may be true that Montrose knew that an action against it by EPA to recover cleanup costs was inevitable, Montrose's "liability" in that action was not a certainty when Admiral issued its policy. The court held that where there is uncertainty about "the imposition of liability" and no "legal obligation to pay" has been established, there is an insurable risk for which coverage may be sought under a CGL policy.

The Ramifications of Montrose

The Montrose decision has significant ramifications for insurance policyholders, including: more insurance companies will be required to provide coverage under more policies than in the past. While Montrose only specifically addressed the duty to defend, it will necessarily affect policyholders' rights to get indemnification.

To some insurance industry representatives, the court's ruling on the "known loss" issue is more surprising and troubling than its trigger of coverage ruling. It means a policyholder may be able to obtain a new insurance policy to cover losses the policyholder is already aware of, as long as there has not been a finding of liability against the policyholder. As a result, insurance companies will likely ask more questions and be more selective when deciding whether to issuex policies because under Montrose they may be required to provide coverage for damages which have already commenced.

Issues of allocation remain undecided and will now take center stage. For example, will a policyholder be able to collect the full amount of defense costs and indemnity from any insurer whose coverage is triggered (leaving it to that insurer to seek contribution from other insurers), or will the insurer instead only be responsible for some pro-rata share? And will the policyholder be held responsible for some share of costs for periods where it was self-insured or is unable to establish its insurance coverage? The court in Montrose expressly declined to state a view on these allocation issues.

While numerous issues of insurance coverage for environmental claims are still to be decided, the Montrose decision resolves two major issues of coverage strongly in favor of policyholders – the "trigger of coverage" and the "known loss" rule.

Montrose Chemical Corp. v. Admiral Insurance Co., 95 Daily Journal D.A.R. 8783, 95 C.D.O.S. 5148 (Cal. Sup.Ct., July 3, 1995).

These materials are provided for information purposes only and are not intended as and cannot be considered legal advice. Before taking action based upon this information, you should consult your legal counsel.

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