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SAN FRANCISCO -- A general liability insurer has won California court approval to invoke a total pollution exclusion to deny covering a restaurant that contributed to a sewage backup at a neighboring business, but other insurers cannot rely on the ruling as legal precedent.
The California Supreme Court's July 8 order to depublish the opinion signals that the court is uncomfortable with the prospect of insurers using pollution exclusions to deny coverage for losses resulting from routine business operations, policyholder attorneys said.
Insurer attorneys, though, emphasized that the state's highest court still allowed an insurer to use its total pollution exclusion to bar coverage for a loss stemming from a routine business practice.
The depublication leaves California with little or no case law on the issue of whether insurers can use absolute or total pollution exclusions to deny coverage for third-party property damage or bodily injuries when the substances involved were part of routine business operations and did not cause environmental damage.
Several state supreme courts have ruled in favor of policyholders in such cases (BI, Dec. 1, 1997; Nov. 10, 1997). Lower courts nationwide are split on the issue.
The California case developed in August 1995 when a pressurized sewage drain pipe leading away from a Panda Express restaurant in a San Francisco shopping mall burst, damaging a neighboring business. The business, Visionary Toys & Games, in 1996 sued the restaurant's owner, Panda Management Co. Visionary sought between $750,000 and $1 million of damages, including various fees, according to insurer attorney Bryan Barber, a partner with Zelle & Larson L.L.P. in Los Angeles. Mr. Barber represents Panda Management's commercial general liability insurer, Wausau Underwriters Insurance Co. of Wausau, Wis. Wausau wrote $1 million of limits, Mr. Barber said.
Visionary argued that the restaurant's routine disposal of cooking oil and grease in the restaurant's sink and floor drains clogged the sewer system. The clog ultimately caused the sewage pipe to burst, Visionary argued.
Wausau denied Panda a defense and coverage, citing the liability policy's total pollution exclusion. The exclusion, which is broader than the absolute pollution exclusion, bars coverage for bodily injury or property damage that "would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, release or escape of pollutants at any time."
A California appellate court in March affirmed a trial court's September 1996 summary judgment for Wausau.
The appellate court determined:
* The waste material in the drain pipe was a pollutant -- as defined by Panda's liability policy -- that is excluded from coverage.
* The restaurant's disposal of cooking oil into the sewer system amounted to a "discharge" and "release" of pollutants -- an act for which the liability policy excluded coverage.
* An endorsement in Panda's property policy that assured the restaurant of coverage in the event of a sewage backup does not create an ambiguity in the restaurant's CGL policy.
Attorneys speculated that the case was "too fact-specific" to support a sweeping state Supreme Court decision on the breadth or limitations of the absolute and total pollution exclusions in losses involving routine business practices and no environmental damage.
"If the court had ruled on it, more than anything, it may have led to some confusion," said insurer attorney Otis D. Wright, a partner with Wilson, Elser, Moskowitz, Edelman & Dicker L.L.P. in Los Angeles. "It probably was wise of the Supreme Court to take this one out of the books."
But, even though Panda lost this coverage battle, policyholders in California won, said Panda attorney David Gauntlett of Gauntlett & Associates in Irvine, Calif.
He said the depublication means the Supreme Court basically disapproves of the appellate court's reasoning in the case. He said insurers should be cautious about making the same arguments in future cases.
The Supreme Court may have depublished the case instead of reviewing and then reversing it because it was the most efficient way for the busy court to extinguish a "one-alarm fire" while it awaits a "three-alarm fire" on the issue, he said.
Policyholder attorney Dorn Bishop, a partner and head of the insurance practice in the San Diego office of Latham & Watkins, suspects the high court depublished the decision for several reasons.
He said the appellate court's decision would have set bad precedent for policyholders because it defined pollutants and discharges too broadly. He said he thought the high court may have been troubled by the finding that disposing of an "everyday" substance in a sewer drain was a pollution discharge. "Do they really want that on the books?"
Policyholder attorney Kirk Pasich, a partner with Troop Meisinger Steuber & Pasich L.L.P., said he agrees. He said courts should consider the point of the original discharge, which in the Panda case was into a sewer system. That should not constitute a pollution release, he said.
Mr. Bishop also suspected the high court may have been troubled by the appellate court's standard of review of insurance contracts and its refusal to interpret the policy as an objective, reasonable layperson would have.
But, insurer attorneys said courts do not have to review a contract under that standard if they find the contract's language clear.
Insurer attorneys said policyholders did not come away with any victory in the case.
"Our claims handling has been upheld. We'll do it again," said Mr. Barber, Wausau's attorney.
Insurer attorney Jeffrey Kaufman of Kaufman & Logan L.L.P. of San Francisco said the depublication probably had little to do with the outcome of the case. "My own speculation is that it was not because of the result but because of a procedural concern or language" in the appellate court's decision with which the high court did not approve.
Panda Management Co. vs. Wausau Underwriters Insurance Co., California Court of Appeal; No. B107856.