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State Supreme Court says insurance companies don't have to pay clients cleanup costs

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Posted: Thursday, February 1, 2001 10:00 pm

SAN FRANCISCO - Insurance companies do not have to pay their clients' environmental cleanup costs ordered by regulatory agencies, the California Supreme Court ruled Thursday in a closely followed case.

The high court, on a 5-2 vote, said insurance companies are only liable for cleanup costs arising from court orders.

The decision is likely to produce delays in cleanups and potentially straddle hundreds of companies with millions in costs that, until Thursday, were covered under so-called "comprehensive general liability insurance policies."

Insurance companies hailed the ruling, the nation's third on this issue following Maine in 1990 and Illinois in 1997.

In dissent, Justice Joyce L. Kennard said the "big losers in today's decision are public health and the environment."

Lodi City Attorney Randy Hays said he couldn't comment on the potential impact of the state Supreme Court's ruling Thursday on the city's contamination lawsuit.

"I would rather read the case than get the little bit of information from you," he told the News-Sentinel on Thursday afternoon.

Instead, Hays said he will wait for the case to be posted on the high court's Web site in the coming days.

Lodi is currently in litigation hoping to force insurance companies to pay for clean up sites known to be contaminated with TCE and PCE.

The case, filed in November in a Sacramento federal court, names 15 defendants the city believes are responsible for the contamination found in a section of downtown and north Lodi.

Since 1994, the state's water and toxic control agencies have issued

some 600 administrative orders to businesses to cleanup contaminated soil or fouled groundwater.

The state has taken that course for 30 years to avoid costly litigation and delays.

Most of the orders to oil, gas, chemical and manufacturing companies are obeyed, and insurance companies have paid the costs.

But in 1998, in a precursor to Thursday's development, the high court said insurance companies are not required to defend their clients' challenges to administrative cleanup orders. The court, in agreeing with a state appeals panel, has now taken that a step further and said the insurance companies do not have to pay to cover the costs of administrative cleanup orders.

The reason, Justice Stanley Mosk wrote for the majority, is that the language in these types of policies, although vague, do not expressly demand it. It was only assumed to be true all these years, Mosk said.

Patrick A. Cathcart, who represented Lloyd's of London in the case, said the decision was a huge victory for the insurance industry.

"You shouldn't be able to layoff uncovered property damage on an insurance company," said Cathcart, who represented Lloyd's after it refused to pay $10 million in cleanup costs at a Santa Fe Springs refinery the state ordered against Powerine Oil Co.

A host of small-to-large-sized companies and the California attorney general urged the court to rule otherwise. They argued that businesses would fight instead of comply with the orders from the state's Regional Water Quality Control Board or the Department of Toxic Substances Control.

Those fights would prolong environmental cleanups and cost taxpayers in litigation expenses, they said. Ironically, they said, the insurance companies ultimately may be liable for the cleanup once the order moved from the administrative arena to the courtroom.

Deputy Attorney General Thomas R. Patterson said the "decision will result in a major step backward for environmental law enforcement and will generate a great deal of additional, time-consuming and potentially complex litigation in courts throughout California."

Powerine said the decision would make it difficult to carry out state orders to cleanup soil and groundwater contamination at its former refinery in Santa Fe Springs.

"This is going to present a big challenge for us to continue to comply with our cleanup and abatement orders," company attorney David Isola said.

Powerine's quest for coverage from its insurer has twisted through the courts. A Los Angeles Superior Court judge ruled in favor of Powerine. An appeals court overturned the ruling in 1999.

The case is Certain Underwriters of Lloyd's of London vs. Superior Court, S084057.

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