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Policyholder wins Calif. pollution cover ruling

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RIVERSIDE, Calif.—A policyholder victory in a pollution coverage case in California gives the state Supreme Court the opportunity to resolve conflicting case law that has created huge problems for policyholders trying to tap their insurance policies for partially covered losses, attorneys in the case agree.

In the coverage litigation over the infamous Stringfellow hazardous waste site near Glen Avon, Calif., a California appellate court in Riverside on Jan. 12 published its earlier ruling that a policyholder does not lose all of its coverage if it cannot distinguish between the covered and noncovered portions of a loss. That burden of proof rests with insurers, which must cover a loss fully if they cannot distinguish which part of the loss is covered, the court ruled.

The decision, which the court originally issued Dec. 28, 2006, overturns a lower court's 2004 summary judgment that cited two rulings by a Los Angeles-based appellate court.

The Riverside appellate court's publication of its ruling in the Stringfellow case means the decision is precedent case law in the district. The court last week denied the insurers' motion for a rehearing and beefed up its earlier decisions against the insurers.

The coverage litigation, which has wended through California's trial and appellate courts on various issues for years, stems from the state's operation of the Stringfellow hazardous waste site for 16 years, beginning in 1956.

A federal judge in 1998 determined that the state 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 wall from collapsing.

Between 1972 and 1978, the state purchased comprehensive general liability coverage from about 30 insurers. The policies contained pollution exclusions that did not bar coverage for sudden and accidental pollution incidents.

But citing a third Los Angeles appellate court decision, the state trial court ruled in its 2004 decision that the so-called "relevant discharge" of the pollutants occurred when they were deposited into the evaporation ponds, which was not a sudden or accidental incident.

In overturning that portion of the underlying decision, the Riverside appellate court noted that the state was not held liable for allowing hazardous waste at the site. The state was held liable for negligently designing and operating the Stringfellow site, the appellate court said.

In addition, the Riverside court noted that the Los Angeles appellate court ruled in another case that insurers are liable for sudden and accidental pollution events that occur after wastes are deposited at a hazardous waste site.

But, criticizing other Los Angeles appellate court rulings, the Riverside court said policyholders do not have to show how much those covered pollution events contributed to the overall pollution to tap their insurance. The court said that state Supreme Court rulings in 1973 and 1989 establish that principle.

The appellate court, quoting the state's policy language, further explained that the state's policies guarantee that the insurers will pay "all sums which the insured shall become legally obligated to pay as damages."

"Since coverage is measured by the extent of the insured's liability to the injured party, this means that there is coverage for the entire injury, even if it is not possible to prove the insured's covered act caused the same injury or the total injury," the court ruled.

The court also found that the watercourse pollution exclusion in the state's policies does not refer to ground water.

The four remaining insurers in the case are: Allstate Corp. of Northbrook, Ill.; Columbia Casualty Co. of Chicago; Century Indemnity Co. of Philadelphia; and Westport Insurance Corp. of Overland Park, Kan.

Insurer attorney Laura A. Foggan, who filed an amicus brief in the case for the Washington-based Complex Insurance Claims Litigation Assn., said the Stringfellow case has a better chance of being reheard than most other cases.

Ms. Foggan, a partner at Wiley, Rein & Fielding L.L.P. in Washington, said the appellate court overlooked a 1999 state Supreme Court decision that burdens policyholders with showing that a pollution incident is covered under the sudden and accidental exception to the pollution exclusion.

But Roger Simpson, an attorney for the state, said the appellate court did consider that ruling but determined it was not helpful. In its 1999 ruling, the state Supreme Court did not require a policyholder to show which percentage of its loss is covered, said Mr. Simpson, a partner with Cotkin, Collins & Ginsburg in Los Angeles.

Robert M. Horkovich, another attorney for the state, says the ruling is welcome precedent for numerous policyholders that are appealing coverage decisions in similar types of cases. Mr. Horkovich is a partner with Anderson, Kill & Olick P.C. of New York.

"If I were litigating in another case, I'd ask for a stay" until the Stringfellow case is reheard or is dealt with by the state Supreme Court, said Darryl L. Doke, the deputy California attorney general in charge of the case.

Because of how bluntly the Riverside court criticized another appellate court, "that's the situation where the Supreme Court should come into play and resolve the conflict," Mr. Doke said.

The insurers' attorney, Steven M. Crane of Berkes Crane Robinson & Seal L.L.P. in Los Angeles said he could not comment on the case.

State of California vs. Underwriters at Lloyd's of London et al., California Court of Appeal--4th District, Division Two, Jan. 12; EO37627.