As discussed in our March 13 post, the California Supreme Court issued its much awaited decision in State of California v. Underwriters at Lloyd’s of London, in which California sought insurance coverage for court ordered environmental remediation costs at the Stringfellow Acid Pits. In addition to reaffirming the concurrent proximate cause rule, the Court settled which “discharge” courts are to analyze when applying the “sudden and accidental” pollution exclusion present in many CGL policies.
Pollution resulted at the acid pits, which essentially were dammed evaporation ponds, from at least three sources: gradual seepage through the fractured rocks beneath the unlined ponds, overflow of the ponds caused by a 1969 rainstorm, and intentional, controlled discharges in 1978 made to prevent overflow and flooding threatened by heavy rains and cracks in the retention dam. Of course, entities had intentionally deposited waste into the pits themselves while the pits were in operation, and indeed, that was the whole point. The insurers argued that those “discharges,” which were obviously not accidental, were the proper subject of the “sudden and accidental” analysis.
The Court held that the initial intentional deposits of pollutants into confinement in the ponds were not even “discharges, dispersals, releases, or escapes” as used in the pollution exclusion because the ponds were expected and intended to contain the pollutants. Additionally the use of the terms “release,” “escape,” “dispersal,” and “discharge” in the pollution exclusion was ambiguous because those words have potentially broad literal meanings, but more narrow connotations in ordinary usage. The Court found that a reasonable insured would not understand the word “release” to include the intentional discharge of a material into a containment pond.
Further, the Court held that even if the initial deposits of pollutants into the acids pits were “discharges, dispersals, releases, or escapes,” those initial discharges would not be the proper subject of the sudden and accidental analysis because they were not the basis of the State’s liability. Rather, the focus of analysis must be on the particular “discharge or discharges that gave rise to that property damage” “[b]ecause the issue is . . . whether the discharge causing the property damage for which the State was found liable was ‘sudden and accidental.’” Because the State was held liable for the release of pollutants into the environment caused by its own negligence, and not for polluting the acid pits themselves, the discharges from the ponds into the environment were the proper subject of the “sudden and accidental” analysis.
It bears mention that the Court reaffirmed the long-standing rules that the sudden and accidental exception to the pollution exclusion is treated like a coverage provision and therefore “‘construed broadly in favor of the insured.’” And “accidental” in the “sudden and accidental” context means “neither intended nor expected to happen,” and an insured “expects” a discharge only when the insured “subjectively knew or believed it was highly likely to occur.”