SAN FRANCISCO—California policyholders are more likely to recover insurance for pollution cleanups as a result of a California Supreme Court ruling last week that shifts the burden of allocation onto insurers in certain circumstances and expands the scope of sudden and accidental clauses in commercial general liability policies.

Ruling in the longstanding coverage dispute over the Stringfellow hazardous waste site near Glen Avon, Calif., the state high court said that when a pollution loss results from insured and uninsured causes, and the policyholder cannot distinguish between the covered and uncovered damages, the policyholder is entitled to coverage for the whole loss up to its policy limit if the covered cause contributed substantially to the damage.

At that point, it is up to the insurer to prove allocation, the court said.

The ruling is significant as it expressly rejects a 2001 California appeals court decision in Golden Eagle Refinery Co. vs. Associated International Insurance Co. that required policyholders to show the amount of damages resulted from covered causes in order to obtain coverage, policyholder attorneys say. It also is likely to affect insurance recovery cases beyond the environmental liability issues reviewed by the court, some say.

In the case, State of California v. Allstate Insurance Co. et al, the California Supreme Court also held that when applying a sudden and accidental pollution coverage clause, the relevant event is the release of pollutants from the site, not the discharge of pollutants onto the site.

While the high court's holding is significant in that it reverses lower court rulings in the state, the number of pollution cases involving CGL policies that cover sudden and accidental pollution have dwindled since the absolute pollution exclusion was introduced in 1986, attorneys say.

Case dates back to 1956

The coverage litigation stems from the state's operation of the Stringfellow hazardous waste site for 16 years, beginning in 1956. The state closed the site to new deposits in 1972 after the discovery of groundwater contamination.

In 1998, a federal judge determined that the state of California was 100% liable for environmental damage the site caused, because the state had negligently designed and operated the site. Environmental contamination occurred when pollutants leaked into groundwater, when heavy rains washed waste into the environment and when a deteriorating dam wall at the site forced the state to release 1 million gallons of contaminants to prevent the dam from collapsing.

Between 1972 and 1978, the state purchased comprehensive general liability coverage from 24 insurers. The policies contained pollution exclusions, with exceptions for sudden and accidental pollution incidents.

Last week's decision involved four of the state's excess CGL insurers: Allstate Insurance Co., Century Indemnity Co., Columbia Casualty Co. and Westport Insurance Corp.

The insurers denied coverage, citing their policies' pollution exclusions. A trial court initially granted them summary judgment.

In upholding the appeals court reversal, the state Supreme Court ruled, among other things, that the state's inability to delineate covered and excluded damages does not preclude coverage.

"If the insured proves that multiple acts or events have concurred causing a single injury or an indivisible amount of property damage...the insured's inability to allocate the damages by cause does not excuse the insurer from its duty to indemnify," the court wrote in its unanimous decision.

It is up to the insurer to present evidence that the damages are divisible and that "only a limited portion of them resulted from covered events," the court said.

The high court also upheld the appeals court in determining the relevant sudden and accidental event that triggers coverage.

The insurers argued that the initial disposals of the waste into the unlined ponds were the relevant discharge and were neither sudden nor accidental. The high court, however, ruled that because the basis for the state's liability was the escape of pollutants into the environment from contaminated ponds on the site, the release of the wastes after they had been deposited was the "relevant discharge."

Policyholder attorneys welcomed the ruling.

"Any policyholder in California or any policyholder whose policy is governed by California law that is interested in trying to tap coverage for environmental cleanup costs really has reason to hope that they will be able to get coverage," said Robert M. Horkovich, an attorney with Anderson Kill & Olick P.C., who represented California in the case.

Prior to the ruling, "if a policyholder couldn't prove the precise amount of covered damages, it got nothing" in terms of insurance, said David B. Goodwin, a policyholder attorney at Covington & Burling L.L.P. in San Francisco. The issue "comes up all the time" in insurance recovery cases and the ruling will go "way beyond the pollution context" to other liability claims as well, such as directors and officers liability and errors and omissions liability cases, he said.

"When all is said and done, the legacy of this case will be the burden of proof and allocation," said Randy Maniloff, an insurer attorney with White & Williams L.L.P. in Philadelphia. "The sudden and accidental pollution exclusion is a dodo bird of a coverage issue--it is on the road to extinction," he said. "But the burden of proof aspect will be around for a long time and will be important in all types of cases--whether they involve pollution or otherwise," he said.

Laura A. Foggan, an insurer attorney with Wiley Rein L.L.P., however, remains cautious about the decision's overall impact describing the decision as being "grounded in its own facts."

The court's holdings "are crafted to the facts of what took place, the selection of the site, the intent to confine at the site and these... unusual rainfall events. All of those facts aren't likely to carry over generally. So we don't know how big of an opinion this really is."