California Supreme Court Finally Confirms Coverage For Breach of Contract Claims Properly Based On Nature of Risk and Injury; Not Plaintiff's Choice Of Pleading.
Vandenberg v. Superior Court, (August 30, 1999), 21 Cal.4th 815
For many years now, California court's have accepted without much analysis a purported distinction between claims based on a breach of contract, where they have denied coverage, and claims for tort damages, which were potentially covered, depending upon the nature of the claim. The California Supreme Court in Vandenberg has finally brought some common sense to this oftentimes artificial distinction.
Factual Background:
Eugene and Katherine Boyd owned and operated an automobile dealership on a parcel of property. In 1958 they began leasing the property to John Vandenberg, who continued in possession of the property until 1988. Upon the conclusion of the Vandenberg's lease, Boyd began to improve the property for sale. In so doing, he discovered and had to remove three underground waste oil storage tanks. Testing revealed contamination of the soils and groundwater under the property. Boyd sued Vandenberg, alleging causes of action for breach of contract, breach of the covenant of good faith and fair dealing, public and private nuisance, negligence, waste, trespass, strict liability, equitable indemnity, declaratory relief, and injunctive relief.
Vandenberg was insured by several companies, including Phoenix Assurance Company of New York, Glens Falls Insurance Company, Continental Insurance Company, TIG Insurance Company, Centennial Insurance Company, and United States Fidelity & Guarantee Company. As is typical of most CGL policies they provided coverage to Vandenberg for sums he was "legally obligated to pay as damages" because of property damage. Certain of the policies contained pollution exclusions, of the "sudden and accidental" variety.
Vandenberg tendered the defense of the action to his insurers. USF&G was the only carrier who agreed to provide a defense. Eventually, the claim was resolved, with USF&G paying the largest share of the settlement. Boyd released all claims against Vandenberg except those based upon contamination constituting a breach of the lease agreements. The parties agreed to resolve that claim through binding arbitration. USF&G agreed to defend the arbitration, reserving its duty to indemnify. The arbitration resulted in a $4 million award to Boyd, which was confirmed by the Superior Court. The arbitrator's decision specifically found that the discharge was not "sudden and accidental." When the insurers refused Vandenberg's request for indemnification, he brought this suit.
The trial court granted the insurers motions for summary adjudication, concluding that there could be no coverage for claims which were not "sudden or accidental" nor where such claims were based on a breach of contract.
The Court of Appeal reversed the summary judgment. The California Supreme Court affirmed the reversal of the Court of Appeal.
Absent Agreement, An Arbitrator's Decision Can Have No Collateral Estoppel Effect:
Initially, the Court dealt with the arbitrator's finding. It concluded that a private arbitration award, even if judicially confirmed, does not have a collateral estoppel effect under California law unless there was an agreement to that effect between the parties. The desire to resolve matters without resort to the judicial process in a concise and inexpensive manner, with informal rules of evidence, formed the basis of the court's rationale. As a result, the finding of the arbitrator that the pollution was not "sudden and accidental" was held to have no binding effect on Vandenberg in the litigation against his insurers. That issue would have to be re-litigated.
Coverage Is Dependent Upon The Nature of the Claim:
In looking at the issue of coverage, the Court reviewed a long line of decisions that held CGL policies to provide coverage for liability arising from tort, as opposed to contract. The Supreme Court specifically overruled this prior conflicting authority. It could find nothing in the insurance contract that warranted such a distinction; nor anything that would alert a reasonable layperson that liability based on a breach of contract would not be covered. As a result, the court citing AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 822 held the phrase "legally obligated to pay" ambiguous and interpreted it in favor of the insured's objectively reasonable expectations and against the insurer.
Predicating coverage upon an injured party's choice of remedy or form of action was improper. Instead, the court held coverage should focus on the nature of the risk and the injury, in light of policy provisions.
Commentary:
This decision finally dispenses with the archaic notion that an insured's rights ought to be based upon the artful pleading of its adversaries, and instead places the determination of coverage on the nature of the claim that is being presented (did it arise from an "occurrence"), as well as the damages being sought (involving personal injury or property damages) in light of the policy language.
For a discussion of other implications of the Vandenberg decision, contact: Ira James Harris, Esq. at 925-258-5100 or by e-mail at ira@iraharris.com.
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