'Sad' Situation: When Does the Potential for Coverage Arise?

Periodical: Los Angeles Daily Journal

Date: March 20, 1995

Montrose Chemical Corp. v. Superior Court, 6 Cal.4th 287 ( 1993), raised several issues surrounding an insurer's duty to defend its insured against third-party claims for environmental cleanup.  Consequently, many had hoped that the California Supreme Court would definitely resolve some of the most vexing issues of coverage law.

The Court provided some coverage holding that insurers could rely on facts extrinsics to the complaint filed against their insurers to negate coverage and the policyholders are entitled to a stay of a coverage action if coverage turns on facts at issue in the underlying action.  The Court declined to decide, however, what precise factual showing is necessary to give rise to potential for coverage and, hence, an insurer's duty to defend.

Montrose Chemical Corporation manufactured DDT at its facility in Torrance from 1947 to 1982. In 1990, the Environmental Protection Agency named Montrose as a defendant in a CERCLA action. Montrose then sued its insurers, seeking a declaration that they owed it a defense and indemnity for any liability imposed. Montrose brought a motion for summary adjudication of the insurers' duty to defend; the insurers opposed on the ground that extrinsic evidence raised a triable issue of fact as to Montrose's entitlement to what defense. Specifically, the insurers argued that the facts implied the alleged property damage was "expected or intended" by Montrose and thus not covered by the policies. The trial court agreed with the insurers and denied Montrose's motion.

The Court of Appeal, however, found that Montrose had made a prima facie showing of potential liability under the policies that, according to California law, gave rise to a duty to defend.  Because the insurers failed to negate this showing with undisputed evidence, the court found that the insurers had an obligation to defend Montrose. The Supreme Court affirmed.

Unfortunately, the Montrose Court's decision was somewhat unclear on the central issue of what, exactly, constitutes a potential for coverage giving rise to a defense duty. "The insured need only show that the underlying claim may fall within policy coverage; the insurers must prove it cannot," the Court stated. While this is perhaps descriptive of the process of proving or negating a defense duty, it tells little about what an insured must do to prove that a claim "may fall within policy coverage," or of how an insurer may show that it cannot.

Somewhat more helpful is the Montrose Court's statement that "once the insured has established potential liability...the insurer must assume its duty to defend unless and until it can conclusively refute that potential." This at least indicated that the insured bears the initial burden of showing that a claim may come within coverage; clearly, if the insured never establishes potential liability in the manner prescribed by the Montrose Court, no duty to defend can arise.

However, the Court failed to articulate a standard for determining when the factual allegations of the complaint, the terms of the policy and any extrinsic evidence have "established potential liability."

Take, for example, facts similar to those of Montrose, except that the insurance policy at issue contains a "sudden and accidental" pollution exclusion eliminating coverage for "bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse of body of water." Under the policy terms, however, this exclusion "does not apply if such discharge, dispersal, release or escape is sudden and accidental."

In cases where there is evidence that a "sudden and accidental discharge" (SAD) caused the pollution, the potential for coverage is apparent. Frequently, however, there will be evidence of an SAD, but substantial evidence of gradual and/or intentional pollution. In these circumstances. what guidance does Montrose offer on whether and when a defense duty exists?

Under California law, the insured bears the initial burden of proving that an SAD caused the damage. See e.g., Aeroquip Corporation v. Aetna Casualty and Surety Co. Inc., 26F.3d 893 (9th Cir. 1994). May it meet its burden simply by noting that the complaint does not specify how the pollution occurred, thus leaving open the "possibility"—however theoretical and unsupported by facts—that an SAD caused the contamination? If not, would it suffice to show that the extrinsic evidence is equally silent about the sources of the pollution at issue? If this is not enough, and affirmative evidence of an SAD is required, could the insured prevail merely by showing that some event occurred during the policy period which might have caused a sudden and accidental discharge of pollutants?

Clearly, such evidentiary showings would be insufficient to avoid the insurer's motion for summary judgment. Equivocal evidence, or evidence which merely invites speculation regarding an essential fact, is not sufficient to avoid summary judgment. Ahrens v. Superior Court, 197 Cal. App.3d 1134 (1988). As one California court has noted, courts "should not hesitate to summarily dispose of meritless litigation based on nothing more than a 'smoke and mirrors' presentation.  “Rochlis v. Walt Disney Co., 19 Cal.App.4th 201 (1993). See also Union Bank v. Superior Court, 31 Cal.App.4th 573 (1995) (plaintiffs' "factually devoid" discovery responses insufficient to avoid summary judgment).

In American States Insurance Co. v. Sacramento Plating Inc., 86 1 F.Supp. 964 (E.D. Cal. 1994), the court held that the insured's speculation that alleged SADs may have caused the contamination could not create a duty to defend in the absence of facts tending to show causation. Significantly, the American States court found no potential for coverage even assuming, without deciding, that the insurer had the  burden of providing that an SAD did not cause the pollution.

Although the American States decision did not directly address what precisely constitutes a "potential for coverage," its reasoning does suggest the following test for determining whether a "potential for coverage" exists. There is no potential for coverage, and thus no duty to defend, if the undisputed facts available to the insurer at the time of its coverage decision do not raise a triable issue of material fact sufficient to prevent summary judgment in the insurer's favor on indemnity. If this test is met, an insurer can safely deny a defense.

This test has several virtues. First, it allows courts and parties to insurance contracts to apply a familiar standard when analyzing coverage. Second, and more importantly, it makes sense. If the undisputed facts compel a finding of no coverage whatsoever, and would entitle the insurer to a judgment in its favor on all claims under a particular policy, there simply is no basis for finding a "potential" for coverage under that policy. Third, the test is applicable to any coverage scenario, regardless of whether the claim for coverage involves construction defects, pollution related liability or first‑party coverage. Finally, the test assures the policyholder that it will not be denied a defense as long as there is a genuine potential, however slight, that coverage exists.

Those who had hoped that Montrose would at one stroke clarify the murky issues of insurers' defense obligations under California law have been, at least in part, disappointed. The task of resolving the questions left unanswered by the Montrose Court, therefore, promises to occupy insurers, policyholders and California courts for years to come.

Our Litigation Department specializes in civil litigation at all levels of the judiciary, and has wide-ranging experience in litigating business, commercial and entertainment-industry related matters. We have extensive experience in accounting and partnership, antitrust, and securities and corporate litigation. Additional areas of emphasis include copyright and intellectual property, real estate and products liability litigation as well as in the appellate practice.

Rosenfeld, Meyer & Susman was founded in 1957.  The Firm’s areas of expertise include: Labor and Employment Law, Litigation, Corporate, Entertainment, Trusts and Estates, Taxation, Family Law, Insurance Coverage and Defense, Real Estate and Employee Benefits.

  Return to top