Case Number: BC271474 Hearing Date: July 01, 2014 Dept: 310

UNION OIL CONSOLIDATED COVERAGE CASES
Case No.: BC271474
Hearing Date: 6/16/14
Department 310

MOTION FOR SUMMARY ADJUDICATION RE: DUTY TO INDEMNIFY FOR ADMINISTRATIVE RESPONSE COSTS ORDERED AT THE AVILA BEACH SITE

TENTATIVE RULING

As to Issue 1: Deny motion for summary adjudication

As to Issue 2: Deny motion for summary adjudication

DISCUSSION

1. Background. The Avila Site was insured under a series of primary and excess policies issued by various insurers. Union Oil has made a claim on the insurers reimburse in excess of $210 million dollars in costs incurred at the Avila Beach site. The Insurers move for an order deter-mining that they have no duty to indemnify Union Oil for any costs Union Oil is obligated to pay in compliance with any of the administrative Water Board Clean-up and Abatement Orders (“CAOs”).

2. Request for Judicial Notice. The request is granted as to exhibits 1, 2, 9, 10, and 11, pursuant to Evidence Code §452(d), as these are all records of a court of the State of California and are all subject to judicial notice under this section. The Court cannot judicially notice the truth of the matters stated within these exhibits. The request is granted as to exhibits 3-8, pursuant to Evi-dence Code §452(c). The CAOs all constitute official acts by an executive department of the state of California, and are subject to judicial notice under this section.

3. Motion for Summary Adjudication. In the instant motion for summary adjudication, the mov-ing Insurers seek summary adjudication of the following issues:

Issue 1: The Moving Parties owe no duty to indemnify Union Oil for any costs it was obligated to pay in compliance with the Water Board’s administrative CAOs – regardless of when those costs were incurred – when the relevant policies obli-gate the Moving Parties to indemnify only court-ordered “damages”

Issue 2: Even if the Court concludes that the costs Union Oil is obligated to pay under the CAOs are transformed into “damages” by being incorporated into the Avila Alliance settlement, the Moving Parties owe no duty to indemnify Union Oil for the costs it incurred in compliance with the CAOs before the June 23, 1998 Avila Alliance settlement, given that such costs could not have been incor-porated into the settlement

Beginning in 1991, the California Regional Water Quality Control Board for the Central Coast Region (the “Water Board”) issued Cleanup or Abatement Orders (“CAOs”). The evidence shows that four (4) such orders were issued by the Water Board prior to October 1, 1996 regard-ing the Avila Beach site: 1) October 18, 1992 (CAO 92-04); 2) August 7, 1992 (CAO 92-139), 3) August 25, 1994 (CAO 94-85), and October 19, 1995 (CAO 95-89).

Then, an action captioned Avila Alliance, et al. v. Unocal Corporation, et al., San Luis Obispo Sup. Ct. Case No. CV 079728 (“Avila Alliance”) was initially brought against Union Oil by the Avila Alliance. It was initially filed October 1, 1996. Subsequently, Communities for a Better Environment and the Environmental Law Foundation joined the litigation as plaintiffs.

Among other things, in the Avila Alliance Second Amended Complaint (“SAC”), the plaintiffs alleged the action “concerns the widespread environmental destruction of the town of Avila Beach, California, and the surrounding waters of San Luis Creek and San Luis Obispo Bay, as a result of [Union Oil’s] lawless discharges and releases of crude petroleum and its by products from their pipelines under the town. These discharges and releases of petroleum and byproducts occur in the soils, groundwater, intertidal zone and San Luis Obispo Bay in connection with de-fendants’ business operations in Avila Beach in San Luis Obispo County, California. [Union Oil’s Exh. 17, Avila Alliance Second Amended Complaint, ¶1.] The SAC also alleged that Un-ion Oil’s “uncontrolled and spreading contamination has destroyed or threatens many of the beneficial uses of groundwater and surface waters of Avila Beach, San Luis Obispo Creek and San Luis Obispo Bay. The contamination also threatens serious harm to the fish, plant and ani-mal life which enjoy and depend upon the natural benefits of Avila Beach and its surroundings. The contamination has also destroyed and continues to threaten lands and waters of the State that comprise part of the public trust.” [Union Oil’s Exh. 17, Avila Alliance SAC, ¶2.]

The Avila Alliance SAC sought “damages, civil penalties, injunctive and declaratory relief, dis-gorgement of profits and other relief as this Court may deem appropriate to redress the actions of [Union Oil] described herein.” [Union Oil’s Exh. 17, Avila Alliance SAC, ¶3.] Specifically, the relief sought included:

(1) Injunctive relief to prevent the continuing operation of Union Oil’s pipelines until it was in compliance with all state and federal laws relating to unlawful dis-charges of petroleum products, the failure to report past and proposed discharges, and Union Oil has in place a proper and complete cleanup and abatement plan for all such discharges;

(2) to undertake an immediate public information campaign to warn the public of the risks from chemicals in petroleum and its byproducts at Avila Beach;

(3) immediately undertake, develop and implement a plan under the supervision of necessary governmental agencies to remediate all contaminated sand and groundwater at the beach and remediate by cleanup or abatement, all petroleum contamination in the soil and groundwater under Front Street and other affected properties in Avila Beach;

(4) monetary damages and restitution for Unocal’s damage to the public trust through their interference with beneficial uses, destruction of water and public lands of the State, and the establishment of a trust fund to ensure complete cleanup and abatement of the contamination;

(5) civil penalties for contamination of a source of drinking water at Avila Beach; and

(6) disgorgement of all profits Union Oil has received as a result of its evasion of, and failure to comply with all the laws cited in the SAC designed to protect the public trust and the natural environment of Avila Beach. [Union Oil’s Exh. 17, Avila Alliance SAC, ¶5.]

While the litigation was pending, the Water Board issued CAO 98-37 on April 9, 1998. CAO 98-37 stated that “CAO No. 94-85, CAO No. 96-42, and CAO No. 96-56 remain in full force and effect. The provisions of CAO No. 98-37 shall take precedence over any provision of previous CAOs that is in conflict with this Order.” [See Union Oil’s Exh. 2, CAO No. 98-37 at AMB_2_0002938.] CAO 98-37 warned:

FAILURE TO COMPLY WITH THE PROVISIONS OF THIS ORDER MAY SUBJECT YOU [UNION OIL] TO FURTHER ENFORCEMENT ACTION, INCLUDING, BUT NOT LIMITED TO, ASSESSMENT OF CIVIL LIABILITY UNDER SECTIONS 13268 AND 13350 OF THE WATER CODE AND REFERRAL TO THE DISTRICT ATTORNEY OR ATTORNEY GENERAL FOR INJUNCTIVE RELIEF AND CIVIL OR CRIMINAL LIABILITY. [Union Oil’s Exh. 2 at AMB_2_0002942.]

Approximately two months later, the parties in Avila Alliance entered into a “Settlement Agree-ment and Judgment,” filed June 25, 1998 (the “Judgment”). [A copy of the Settlement Agree-ment and Judgment is attached as Exhibit 1 to Union Oil’s Evidence Packet in Support of its Op-position to the Insurers’ Motion.] Section 5.1 of the Judgment states:

5.1. The parties agree to settle all of the Plaintiffs’ claims for monetary re-lief…based on Unocal’s payment of $12,000,000 in cash and the performance of projects and actions set forth in paragraphs 5.4, 5.5, and 5.6 below. Although the money will be allocated by Plaintiffs in accordance with paragraph 5.3 [] below, it is Unocal’s desire and intent that as much of the $12,000,000 as possible be spent for projects directly benefiting the town of Avila Beach. The total value of this monetary portion of the Settlement described in this Section 5 is deemed to be $18,000,000. [See Union Oil’s Exh. 1, Avila Alliance Settlement Agreement and Judgment at §5.1, 12:24-13:2.]

In addition, the settlement agreement and judgment purported to settle the plaintiffs’ claims for injunctive relief. Under the settlement agreement and judgment, Unocal agreed, inter alia, to excavate the beach, Front Street, and North of Front Street areas in compliance with Cleanup and Abatement Order No. 98-37 (“CAO 98-37”) and to comply with all of the requirements of CAO 98-37 issued by the Water Board on April 3, 1998. [Union Oil’s Exh. 1, Avila Alliance Settle-ment Agreement and Judgment at §4.1, 4:16-19.]

The settlement agreement and judgment also stated that “[a]ny disputes regarding Union Oil’s compliance with the requirements of CAO 98-37 will be resolved under the procedures set forth in Paragraph 4.9 , below, except that, in addition, the Water Board retains its rights to enforce the CAO under its existing authority, including, but not limited to, administrative and civil en-forcement authority.” [Union Oil’s Exh. 1, Avila Alliance Settlement Agreement and Judgment at §4.1 at 4:19-22.] Judge James D. Ream “Ordered, Adjudged, and Decreed” the terms of the Settlement Agreement and Judgment on June 23, 1998. [Id. at AMB 007073.]

Prior to Judge Ream signing the Settlement Agreement and Judgment, the Water Board, the State of California, and the Department of Fish and Game (“DFG”) filed a complaint-in-intervention, and became parties to the Avila Alliance litigation. [Union Oil’s Exh. 18] The complaint-in-intervention alleged that the action resulted “from defendant Unocal and its subsidiaries dis-charg[ing] and threat of discharg[ing] into the ground, groundwater, and the ocean of large quan-tities of petroleum, petroleum products, and other petroleum-related hazardous substances from Unocal’s pipelines into, around, and under the town of Avila Beach[.]…DFG and the Water Board seek full characterization of the contamination, full remediation, and full compensation for the natural resource injuries caused as well as the penalties for [Union Oil’s] actions and its fail-ure to comply with administrative orders issued by the Water Board.” [Union Oil’s Exh. 18, Complaint-in-Intervention, ¶1.]

The prayer for the Complaint in intervention sought, inter alia, civil penalties, damages for injury to the environment and natural resources and costs of response and assessment, and temporary restraining orders, preliminary injunctions, permanent injunctions, or other orders prohibiting non-compliance with federal and state laws and rules, regulations, permits, standards, require-ments, and orders promulgated or executed thereunder. [Union Oil’s Exh. 18, Prayer for Relief, ¶¶1-3.]

Thus, the parties signing the Settlement Agreement were the California Department of Fish & Game, the Water Board, the County of San Luis Obispo, Communities for a Better Environment, Avila Alliance, the Environmental Law Foundation, and Union Oil.

As discussed in Union Oil’s motion #6, it seems evident that the Avila Alliance Judgment does, at the very least, partly stand as “money ordered by a court.” Union Oil is obligated to pay cer-tain damages under the Judgment. The fact that the terms of the Settlement Agreement were also encapsulated into a Judgment signed by the San Luis Obispo Superior Court, requiring payment of specific designated amounts, must have significance. The Settlement Agreement and Judg-ment was “ORDERED, ADJUDGED, AND DECREED” by Judge Ream. Plainly, the Settle-ment Agreement and Judgment, at least in part, evidences damages awarded by a court, suffi-cient to satisfy the strictures of Powerine I and Foster-Gardner. [See discussion of these cases in MSA Number 5]

However, the Settlement Agreement and Judgment’s requirement that Union Oil comply with the previously-issued CAO 98-37 (by way of injunctive relief) also has significance. The fact that the CAO 98-37 appears in the Settlement Agreement and Judgment does not necessarily transform this administrative order into “money ordered by a court.” There was a prior obliga-tion to comply with CAO 98-37 (not to mention the prior CAOs) before the Avila Alliance case settled. The injunctive relief portion of the Avila Alliance Settlement Agreement and Judgment provides that if there was any conflict between the Settlement Agreement and Judgment and the terms of CAO 98-37, the terms and conditions of CAO 98-37 control. [See Avila Alliance Set-tlement Agreement and Judgment, §4.1 at 4:26-28.]

As Union Oil points out, the Practice Guide notes that a Water Board order is nothing more than “a threat to take legal action” as opposed to an adjudicative administrative agency proceeding (which itself may result in a determination of liability and an award of damages, pursuant to Am-eron Int’l. Corp. v. Ins. Co. of State of Penn. (2010) 50 Cal.4th 1370). California Practice Guide, Insurance Litigation, ¶7.607.6b (The Rutter Group 2013). However, the fact that CAO 98-37 was a part of the Settlement Agreement and Judgment indicates that the power and authority of the Court was necessary to effectuate the remedy.

This result is supported by Aerojet-General v. Commercial Union Ins. (2007) 155 Cal.App.4th 132. In Aerojet, the plaintiff insured sued defendant excess liability insurance carriers for breach of contract and declaratory relief due to their refusal to indemnify the insured for costs the in-sured incurred to remediate polluted real property pursuant to a settlement agreement from an-other legal action. The Sacramento County Superior Court, California, granted summary judg-ment to the carriers. The insured appealed.

The Court of Appeal concluded that the excess liability insurance carriers had no
duty to indemnify the insured for the costs it incurred in implementing its settlement agreement with various water entities because there was no court order requiring the insured to pay money to the water entities. All of the excess policies were written to limit the scope of indemnity cov-erage to all sums the insured was obligated to pay as damages. There was no language in the policies suggesting that indemnity was owed for anything other than damages. The Court of Ap-peal found the settlement costs incurred by the insured were not damages and were not within the policies’ indemnity obligations.

Critically, though, in finding no duty to indemnify, the Aerojet-General court observed:

Here, the record contains no order by the court directing Aerojet to pay damages. The settlement agreement was negotiated and agreed to by Aerojet and the water entities themselves. There is no evidence they sought for the terms of the agree-ment to be entered as the judgments in the lawsuits. Indeed, there are no judg-ments entered in the record at all. Instead, there are only stipulations and orders for dismissal without prejudice, and voluntary dismissals without prejudice. Noth-ing in the record indicates the court ordered Aerojet to pay any sum of money. Accordingly, the settlement costs are outside the scope of indemnity coverage in defendants’ policies. Aerojet, supra, 155 Cal.App.4th at 144 (emphasis added).

In the Aerojet case, the Court seems to have anticipated that if the terms of settlement agreement from the other legal action had been encapsulated in a judgment, indemnity coverage may very well have been available. In this case, the Settlement Agreement between the parties in Avila Alliance was so encapsulated.

CDM Investors v. Travelers Casualty (2006) 139 Cal.App.4th 1251, relied on by the Moving In-surers, is distinguishable. In that case, the trial court had sustained the demurrers of a primary insurer and an umbrella insurer in their insureds’ action seeking coverage for the costs to respond to an order of the California Water Quality Control Board to test a commercial real property that they leased to tenants. The insureds principally argued on appeal that the trial court misinter-preted standard form comprehensive or commercial general liability and excess/umbrella insur-ance policies (CGL policies) as not providing coverage for “response costs” incurred pursuant to an administrative order that charged the insureds with being suspected dischargers of pollutants causing damage to soil and groundwater.

The Court of Appeal affirmed the judgment, holding that the pollution exclusion in the primary insurer’s policy precluded coverage. The Court of Appeal determined that there could be no question that the Water Board ordered the insureds to test for pollutants and that the insureds sought reimbursement for the costs incurred to make the tests. The Court of Appeal reasoned that the insureds made no convincing argument that the costs for which they sought reimbursement were not government-directed costs within the meaning of the policy. The coverage clause in the umbrella policy imposing the duty to indemnify, according to the Court, was clear in its limita-tion to court-rendered damages. Further, the Court determined that the indemnity claim of the insureds’ tenants against them could not be characterized as the functional equivalent of an alle-gation seeking affirmative relief that could have been asserted as a suit for damages, which, in turn, might constitute a suit for damages within the meaning of the usual CGL policy duty-to-defend provision, because the claim was purely defensive—it sought and functioned only to re-impose upon the insureds what they were already legally obligated for.

The critical distinction between the instant litigation and CDM Investors, however, is that CDM Investors did not involve any court judgment – stipulated or otherwise. If it had, the result of CDM Investors may very well have been similar to that in Aerojet. Accordingly, CDM Investors is not persuasive in the context of the instant motion.

To grant the Insurers’ motion as to Issue 1, as prayed, would require the Court to ignore the fact that there was a judgment entered here. To find otherwise may not only undermine the authority of the Court which “ordered, adjudged, and decreed” the Settlement Agreement and Consent Judgment, it would discourage in general the practice of parties seeking and obtaining such con-sent judgments.

It is also significant that the Avila Alliance settlement agreement and consent judgment was en-tered about three years before the California Supreme Court handed down its decision in Pow-erine I (and even a month and a half prior to Foster-Gardner, Inc. v. National Union Fire Ins. (1998) 18 Cal.4th 857, which was handed down in August 1998). Thus, it would have been diffi-cult for Union Oil to intentionally circumvent California law permitting indemnification for all sums the insured became legally obligated to pay as “damages” (as there was no bright-line stan-dard to rely upon at the time).

Issue 1 cannot be summarily adjudicated in the Moving Insurers’ favor. Accordingly, the motion is denied. In denying the motion, however, the Court emphasizes that it is not finding at this time, as a matter of law, that the sums ordered under the Settlement Agreement and Judgment are subject to the indemnity provisions of the applicable insurance policies at issue — this is an issue reserved for trial.

Issue 2: Even if the Court concludes that the costs Union Oil is obligated to pay under the CAOs are transformed into “damages” by being incorporated into the Avila Alliance settlement, the Moving Parties owe no duty to indemnify Union Oil for the costs it incurred in compliance with the CAOs before the June 23, 1998 Avila Alliance settlement, given that such costs could not have been incorporated into the settlement. Here, certain Insurers move for an order determining that, even if the Court concludes that the costs Union Oil is obligated to pay under the CAOs are transformed into “damages” by being incorporated into the Avila Alliance settlement, the Mov-ing Parties owe no duty to indemnify Union Oil for the costs it incurred in compliance with the CAOs before the June 23, 1998 Avila Alliance settlement, given that such costs could not have been incorporated into the settlement.

CAO 98-37, which was incorporated into the Avila Alliance Settlement Agreement and Judg-ment, provided that “CAO No. 94-85, CAO No. 96-42, and CAO No. 96-56 remain in full force and effect. The provisions of CAO No. 98-37 shall take precedence over any provision of previ-ous CAOs that is in conflict with this Order.” [See Union Oil’s Exh. 2, CAO No. 98-37 at AMB_2_0002938.] While it does appear that Union Oil incurred significant costs prior to CAO 98-37 and the Avila Alliance Settlement Agreement and Judgment, the fact that CAO 98-37 made reference to these four prior CAOs (stating that they remained in full force and effect) raises a question as to whether the costs incurred by the identified CAOs also constitute “dam-ages ordered by a court.” This is an issue that cannot be resolved on summary adjudication.

However, to the extent that the Moving Insurers are seeking an order adjudicating they have no duty to indemnify for CAOs not referenced or incorporated into the Avila Alliance Settlement Agreement and Judgment (and that such costs were purely administrative costs ordered by the Water Board), this may have merit. Nevertheless, the way in which the Insurers’ motion was worded seeks to summarily dispose of all costs incurred prior to the date of the Avila Alliance settlement. Accordingly, the motion for summary adjudication as to Issue 2 is denied in full.

Specific insurance policies.Given the ruling on the motion for summary adjudication, the Court need not examine the language of the specific insurance policies to assess whether they order “damages” versus “costs” or “expenses.”