Opinion
20-cv-07923-EMC
06-05-2023
CASA NIDO PARTNERSHIP, Plaintiff, v. JAE KWON, et al., Defendants.
ORDER GRANTING IN PART AND DENYING IN PART CASA NIDO'S MOTION FOR PARTIAL SUMMARY JUDGMENT, AND GRANTING IN PART AND DENYING IN PART SENTRY'S CROSS-MOTION FOR SUMMARY JUDGMENT
Docket Nos. 148, 157
EDWARD M. CHEN, UNITED STATES DISTRICT JUDGE
I. INTRODUCTION
This is an environmental cleanup case brought by Plaintiff Casa Nido Partnership (“Casa Nido”) against several defendants, including Defendants Catherine O'Hanks (“O'Hanks”) and Sentry Insurance Company (“Sentry”). Casa Nido is the owner of the building in which O'Hanks operated a dry-cleaning business from 1960 to 1992. See Docket No. 147 (“TAC”). Sentry issued an insurance policy to O'Hanks with Casa Nido listed as an “Additional Insured.” Id. Casa Nido alleges O'Hanks, while operating the facility, released Tetrachloroethylene (“PCE”) onto the floor and into the groundwater below the facility, for which Casa Nido spent hundreds of thousands of dollars remediating. Id. Casa Nido alleges it is entitled to indemnification and contribution from O'Hanks under the federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). Id.
O'Hanks counter-claimed against Casa Nido. See Docket No. 51. In response, Casa Nido sent a Tender of Defense and Indemnity to Sentry, claiming Sentry has a duty to defend Casa Nido against O'Hanks' counter-claim. TAC ¶¶ 37-45. Sentry subsequently informed Casa Nido that it determined it has no duty to defend or indemnify. Id.; see also Docket No. 64, Ex. E (“Denial Letter”).
Now pending are Casa Nido's claims for declaratory relief and for partial summary judgment, as well as Sentry's cross-motion for summary judgment, on three issues: (1) whether Sentry owes a duty to defend against O'Hanks' cross-claim, (2) whether Sentry's costs of defending Casa Nido are limited to $100,000 pursuant to the DCE, and (3) whether Sentry's failure to defend Casa Nido constitutes a breach of the covenant of good faith and fair dealing. See Docket No. 148 (“Casa Nido Mot.”); Docket No. 157 (“Sentry Cross-Mot.”).
As set forth below, the Court GRANTS Casa Nido's motion for partial summary judgment with respect to Sentry's duty to defend Casa Nido and DENIES Sentry's cross-motion for summary judgment as to the same.
The Court DENIES Casa Nido's motion for summary judgment with respect to whether Sentry's costs of defending Casa Nido are limited to $100,000 pursuant to the DCE, and GRANTS Sentry's cross-motion for summary judgment as to the same.
The Court GRANTS Sentry's cross-motion for summary judgment as to whether its refusal to defend Casa Nido against O'Hanks' counter-claim constitutes a breach of the covenant of good faith and fair dealing.
II. RELEVANT BACKGROUND
A. Factual Background
In 1976, Casa Nido purchased the real property (the “Property” or “Site”) located at 12210 San Pablo Avenue, Richmond, California, and is the current owner to this day. See Docket No. 148-1 (Joint Stipulation to Agreed Facts) (“Fact Stip.”) ¶ 5. O'Hanks owned and operated a drycleaning facility at the Property from 1960 until 1992. Id. ¶ 8.
In August 2016, Casa Nido learned of PCE subsurface contamination at the Property from a Site Assessment Report conducted by Pangea Environmental Services, Inc. (“Pangea”). Id. ¶ 7. Casa Nido stipulates that it “did not know, nor had any reason to know, before 2016, of the existence of the subsurface contamination.” Id. ¶ 8. Casa Nido alleges that due to equipment malfunction or improper usage, “there were sudden and accidental spills and equipment overflows of PCE . . . during the 32-year period that Defendant O'Hanks operated the dry-cleaning business on the Property . . . and these sudden and accidental spills and overflows resulted in PCE being released.” See TAC ¶ 20.
Robert Clark-Riddell, a civil engineer at Pangea, submitted a declaration in support of Casa Nido's motion stating that in his professional opinion:
[T]he risk of PCE spills, leaks, and accidental and sudden releases was significant during the 1960's, 1970's, and into the 1980's and 1990's. This is because PCE usage by U.S. drycleaners peaked in the late 1970s and drycleaning machine technology [] declined significantly by 2000 . . . the risk of PCE spills, leaks, and accidental and sudden releases likely continued into the 1980's and 1990's due to gradual implementation of new environmental laws and regulatory oversight. In 1976, the Resource Conservation and Recovery Act (RCRA) was enacted to address public concern about the serious problems related to disposal of hazardous wastes . . . Section 3002 [of the RCRA] required standards for generators of hazardous waste covering record-keeping, reporting, labeling, use of appropriate containers, and a manifest system.
Docket No. 168-2 (Declaration of Robert Clark-Riddell) (“RCR Decl.”) ¶ 17. The Contra Costa County Health Services Department, Environmental Health Division (“CCCEHD”) performed inspections of the Site in the 1980's and 1990's. See id. ¶ 14. A CCCEHD report from December 31, 1984 showed the average PCE waste generation of 25 gallons per month, with spent PCE stored in a 55-gallon container that was picked up by a waste disposal service every two months. Id. The 1984 report stated that no plan of correction was necessary and found zero violations. See RCR Decl. at Ex. B, App. D (“CCCEHD Records”) at 719-20. This inspection report was signed by O'Hanks and the agency inspector Gabe Adebiyi. Id. A February 15, 1991 report, signed by Jae Kwon and inspector Adebiyi, listed 10-15 gallons per month of PCE waste, and recommended the need for employee training, a written contingency/emergency plan, and required accumulation date on labels. Id. at 721-23; RCR Decl. ¶ 17. Specifically, the report marked the following areas as “violations” of the California Administration Code: labels under General, training under Prevention, and name list and copies under Contingency. CCCEHD Records at 721.
Mr. Clark-Riddell stated that the first agency inspections of the Site by the CCCEHD “are the result of the changing laws and regulations in the early 1980's.” RCR Decl. ¶ 17. He noted, “PCE releases persisted at drycleaning facilities despite the increasing inspections, laws, and regulations. The CCCEHD inspection reports referenced above from 1984 to 1999 document continued PCE usage, waste accumulation, and waste disposal during this period, and the 1991 inspection report identified the need for improved PCE handling[.]” Id.
Mr. Clark-Riddell also opined, “[T]he fact that PCE leaks and releases can readily move through concrete means that PCE can impact the subsurface quickly after the release and allow for leaks and releases over time to continue to impact the site subsurface.” Id. ¶ 18. He further stated, “[I]t is more probable than not that the PCE releases at the Site were the result of periodic or ongoing spills and leaks, and possibly one or more sudden and accidental releases.” Id. ¶ 23; Docket No. 168 (“Casa Nido Reply”) at 2. Mr. Clark-Riddell stated that based on the presence of PCE found near and below soil level at the Site and the estimated 275 feet of PCE groundwater plume length observed, “[T]he detected PCE is the result of PCE release(s) commencing in the 1960's or 1970's. This characterizes the first releases at the Site but does not preclude nor make unlikely later releases.” Id. at ¶ 26-27. Mr. Clark-Riddell noted that the front-end of the observed 275-foot PCE plume was most likely due to a release in 1984 or later. Id. ¶ 26.
Sentry issued three consecutive policies to First Name Insured O'Hanks and Additional Insured Casa Nido, all with policy No. 33-14146-01 (“Sentry Policies”). Fact Stip. ¶ 1-3. The Sentry Policies were effective from August 15, 1987 to August 15, 1990 (“Policy Period”). Id. ¶ 4. The policies are comprised of the following relevant sections: (1) the Businessowners Liability (“BL”) Coverage Form, and (2) the Dry Cleaners Endorsement (“DCE”). See Docket No. 74-1 (“Sentry Policies”).
Notably, while the BL Coverage Form generally tracks standard CGL language, the DCE, which provides the exception to the BL Coverage pollution exclusion, does not use standard CGL language.
1. The Businessowners Liability Coverage Form:
A. COVERAGES
1. BUSINESS LIABILITY. We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury”, “property damage”, “personal injury” or
“advertising injury” to which this insurance applies. No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for under COVERAGE EXTENSION - SUPPLEMENTARY PAYMENTS.
a. This insurance applies only:
(1) To “bodily injury” or “property damage”:
(a) That occurs during the policy period;
and
(b) That is caused by an “occurrence”. The “occurrence” must take place in the “coverage territory”.
...
b. We will have the right and duty to defend any “suit” seeking those damages. But
(1) The amount we will pay for damages is limited as described in Section D - Limits of Insurance;
(2) We may investigate and settle any claim or “suit” at our discretion; and
(3) Our right and duty to defend end when we have used up the applicable limit of insurance in the payment of judgments or settlements or medical expenses.
D. LIABILITY AND MEDICAL EXPENSES LIMITS OF INSURANCE
1. The Limits of Insurance shown in the Declarations and rules below fix the most we will pay regardless of the number of:
a. Insureds;
b. Claims made or “suits” brought; or c. Persons or organizations making claims or bringing “suits”.
Sentry Policies (BL Coverage Form) § (A)(1), (D)(1).
2. The Businessowners Liability Coverage Form includes the Supplementary Payments Provision, in relevant part:
e. COVERAGE EXTENSION - SUPPLEMENTARY PAYMENTS
In addition to the Limit of Insurance, we will pay, with respect to any claim or “suit” we defend:
(1) All expenses we incur.
...
(4) All reasonable expenses incurred by the insured at our request to assist us in the investigation or defense of the claim or “suit”[.]
Sentry Policies (BL Coverage Form) § (A)(1)(e).
3. The Businessowners Liability Coverage Form further includes a pollution exclusion (“Pollution Exclusion”), which states:
B. EXCLUSIONS
1. APPLICABLE TO BUSINESS LIABILITY COVERAGE -This insurance does not apply to:
...
f. (1) “Bodily injury” or “property damage” arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants[]
Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.
Sentry Policies (BL Coverage Form) § (B)(1)(f).
4. Definition of “occurrence”:
F. LIABILITY AND MEDICAL EXPENSES DEFINITIONS
...
9. “Occurrence” means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.
Sentry Policies (BL Coverage Form) § (F)(9).
5. The DCE entitled “Dry Cleaners Additional Coverages” in the Policy states:
II. LIABILITY
The following provisions are added to the Businessowners Liability Coverage Form.
...
M. POLLUTION LIABILITY INSURANCE
1. The pollution liability exclusion (B.1.f.) does not apply to “bodily injury” or “property damage” covered by the following paragraph.
2. This insurance applies to “bodily injury” or “property damage” arising from the actual, alleged or threatened discharge, dispersal, release or escape of pollutants. Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.
a. A separate pollution limit of $100,000 applies to all damages, including sums paid under Coverage Extension - Supplementary Payments, for all occurrences during the policy period.
...
b. For purposes of pollution liability, including limits of liability, occurrence is the date on which “bodily injury” or “property damage” first manifests itself. The policy in effect at that time, and no other, shall apply to the “bodily injury” or “property damage,” including any enhanced injury or damage resulting from continued or repeated exposure to the same pollutants beyond the policy period.
Sentry Policies (DCE) § (II)(M) (emphasis added).
III. LEGAL STANDARDS
A. Summary Judgment
Summary judgment is proper “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a).
An issue of fact is genuine only if there is sufficient evidence for a reasonable jury to find for the nonmoving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986). “The mere existence of a scintilla of evidence . . . will be insufficient; there must be evidence on which the jury could reasonably find for the [nonmoving party].” Id. at 252. At the summary judgment stage, evidence must be viewed in the light most favorable to the nonmoving party and all justifiable inferences are to be drawn in the nonmovant's favor. See id. at 255.
Where a defendant moves for summary judgment based on a claim for which the plaintiff bears the burden of proof, the defendant need only point to the plaintiff's failure “to make a showing sufficient to establish the existence of an element essential to [the plaintiff's] case.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
When parties file cross-motions for summary judgment or partial summary judgment, “[T]he mere fact that the parties make cross-motions for summary judgment does not necessarily mean that there are no disputed issues of material fact and does not necessarily permit the judge to render judgment in favor of one side or the other.” Starsky v. Williams, 512 F.2d 109, 112 (9th Cir. 1975). However, summary judgment in favor of one party may be appropriate where “the parties in fact agree[ ] that all of the underlying material facts [are] those reflected by the written record before the court,” and only a legal dispute remains. Id.; USF Ins. Co. v. Clarendon Am. Ins. Co., 452 F.Supp.2d 972, 984 (C.D. Cal. 2006).
B. Interpretation of Insurance Policy
The interpretation of the terms of an insurance policy generally is a question of law. Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1, 44 (Cal. 1995). “Interpretation of insurance contracts under California law requires [that courts] employ general principles of contract interpretation.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008) (citing MacKinnon v. Truck Ins. Exch., 31 Cal.4th 635 (2003)).
The California Supreme Court explained:
The fundamental rules of contract interpretation are based on the premise that the interpretation of a contract must give effect to the “mutual intention” of the parties. “Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. Such intent is to be inferred, if possible, solely from the written provisions of the contract. The ‘clear and explicit' meaning of these provisions, interpreted in their ‘ordinary and popular sense,' unless ‘used by the parties in a technical sense or a special meaning is given to them by usage', controls judicial interpretation.” A policy provision will be considered ambiguous when it is capable of two or more constructions, both of which are reasonable. But language in a contract must be interpreted as a whole, and in the circumstances of the case, and cannot be found to be ambiguous in the abstract. Courts will not strain to create an ambiguity where none exists.Waller, 11 Cal.4th at 18-19 (citations omitted). In an insurance coverage dispute, “coverage is interpreted broadly so as to afford the greatest possible protection to the insured, [whereas] exclusionary clauses are interpreted narrowly against the insurer.” Manzarek, 519 F.3d at 1032 (citing MacKinnon, 31 Cal.4th at 648). An “exclusionary clause must be conspicuous, plain and clear.” Id. (quoting MacKinnon, 31 Cal.4th at 648). “The burden is on the insured to establish that the claim is within the basic scope of coverage and on the insurer to establish that the claim is specifically excluded.” MacKinnon, 31 Cal.4th at 648. If the insurer can show the occurrence is specifically excluded, the burden shifts back to the insured to show an “exception affords coverage.” Aydin Corp. v. First State Ins. Co., 18 Cal.4th 1183, 1192 (1998), as modified on denial of reh'g (Oct. 14, 1998). Here, the BL Coverage Form provides the basic scope of coverage, which excludes pollution coverage, and the DCE provides an exception to that exclusion. Thus the burden rests on the insured to show the exception affords coverage.
C. Duty to Defend
Under California law, an insurer's duty to defend an insured is broader than the duty to indemnify and may apply where no damages are ultimately awarded. Horace Mann Ins. Co. v. Barbara B., 4 Cal.4th 1076, 1081 (1993); Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 278 (1966). An insurer has a duty to defend against lawsuits brought against its insured that potentially seek covered damages; an insurer has a duty to indemnify its insured when the insured has been found liable for damages actually covered by the policy. See Collin v. Am. Empire Ins. Co., 21 Cal.App.4th 787, 803 (1994).
“[T]he determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy. Facts extrinsic to the complaint give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy.” Waller, 11 Cal.4th at 19. “If any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially covered by the policy, the insurer's duty to defend arises and is not extinguished until the insurer negates all facts suggesting potential coverage. On the other hand, if, as a matter of law, neither the complaint nor the known extrinsic facts indicate any basis for potential coverage, the duty to defend does not arise in the first instance.” Scottsdale Ins. Co. v. MV Transportation, 36 Cal.4th 643, 655 (2005). “In general, doubt as to whether an insurer owes a duty to defend ‘must be resolved in favor of the insured.'” Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 59 Cal.4th 277, 287 (2014) (internal citation omitted).
IV. DISCUSSION
A. Duty to Defend
Whether Sentry has a duty to defend Casa Nido depends on whether the pollution, i.e., the PCE contamination, occurred within the Policy Period. If the pollution occurred outside of the Policy Period, then Sentry would not have a duty to defend because there would be no possibility of coverage. Whether the pollution occurred within the Policy Period depends on what the trigger of coverage is under the Sentry Policies. “‘[T]rigger of coverage' is a term of convenience used to describe that which, under the specific terms of an insurance policy, must happen in the policy period in order for the potential of coverage to arise. The issue is largely one of time-what must take place within the policy's effective dates for the potential of coverage to be ‘triggered'?” Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal.4th 645, 655 n. 2 (1995) (emphasis in original). Casa Nido argues that the “continuous injury trigger” applies to the Policies. See Casa Nido Reply at 3. Sentry argues that the “manifestation trigger” as defined by Montrose applies here. See Sentry Cross-Mot. at 8-10.
1. Interpretation of “First Manifests”
The Sentry Policies cover pollution-based property damage “[t]hat occurs during the policy period.” Sentry Policies (DCE) § (I)(A). For purposes of pollution liability under the DCE, property damage “occurs” when it “first manifests itself.” Sentry Policies (DCE) § (II)(M). In Montrose, the California Supreme Court explained that the manifestation trigger is an objective “should have known” standard: coverage is triggered at “that point in time when appreciable damage occurs and is or should be known to the insured, such that a reasonable insured would be aware that his notification duty under the policy has been triggered.” Montrose, 10 Cal.4th at 674.
However, because Montrose was decided five to eight years after the policies in question were written, the Court examines the meaning of the trigger language when the parties contracted. As such, the relevance of Montrose turns on the extent it accurately described California law on the meaning of “manifests” in the insurance context at the time the parties entered into the contract.
Here, it is clear that the meaning of the term “manifests” at the time the parties entered the contract was in accord with the objective standard articulated in Montrose. See, e.g., Cal. Union Ins. Co. v. Landmark Ins. Co., 145 Cal.App.3d 462, 476 (Ct. App. 1983); Home Ins. Co. v. Landmark Ins. Co., 205 Cal.App.3d 1388, 1392 (Ct. App. 1988) (first citing Cal. Union Ins. Co., 145 Cal.App.3d 462; and then citing Snapp v. State Farm Fire & Cas. Co., 206 Cal.App. 2d 827 (Ct. App. 1962)). In Cal. Union Ins. Co., a case determining two insurance companies' coverage obligations for property damage, the court held that coverage is triggered when “the damage first becomes apparent[.]” 145 Cal.App.3d at 476. Applying this standard to the facts before it, the court stated that the property “damage first manifested itself” in 1980, “albeit its cause had its genesis in June 1979 when the pool was installed and filled.” Id. (emphasis added). Later, in Home Ins. Co., the court stated that “in property damage cases ‘manifestation' routinely refers to when the damage first ‘becomes apparent.'” 205 Cal.App.3d at 1392. See also Clemco Indus. v. Com. Union Ins. Co., 665 F.Supp. 816, 822, 826-27 (N.D. Cal. 1987), aff'd, 848 F.2d 1242 (9th Cir. 1988); Todd Shipyards Corp. v. Black, 717 F.2d 1280, 1290 (9th Cir. 1983) (explaining an injury manifests itself “when it becomes reasonably capable of medical diagnosis.” (internal citation omitted) (emphasis added)); Urie v. Thompson, 337 U.S. 163, 170 (1949) (“The record before us is clear that Urie became too ill to work in May of 1940 . . . There is no suggestion that Urie should have known he had silicosis at any earlier date . . . ‘It follows that no specific date of contact with the substance can be charged with being the date of injury . . . consequently the afflicted employee can be held to be “injured” only when the accumulated effects of the deleterious substance manifest themselves.'” (quoting Associated Indem. Corp. v. State Indus. Acc. Comm'n, 124 Cal.App. 378, 381 (Cal.Ct.App. 1932) (emphasis added)). There can be no doubt that a determination as to the time at which damage becomes “apparent” is based on an objective standard. It follows, then, that California courts have long understood the manifestation trigger in a manner akin to the objective manifestation standard set forth in Montrose, and thus that presumably was what the parties herein intended when they contracted.
As Sentry notes, the dictionary definitions of the term “manifest” comport with the objective interpretation of the manifestation trigger eventually set forth in Montrose. Sentry Reply at 6. Courts often refer to dictionary definitions in interpreting insurance policies. Northrop Grumman Corp. v. Factory Mut. Ins. Co., 563 F.3d 777, 784 (9th Cir. 2009). The Oxford English Dictionary defines manifest as “[c]learly revealed to the eye, mind, or judgement; open to view or comprehension; obvious.” Manifest, Oxford English Dictionary (3rd ed. 2000). The American Heritage Dictionary defines manifest as “[c]learly apparent to the sight or understanding; obvious.” Manifest, American Heritage Dictionary (5th ed. 2022).
This understanding was consistent with a national consensus on the meaning of the term “manifests” in the insurance context. See, e.g., Ins. Co. of N. Am. v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980) (“The date of manifestation is the date when the worker knew or should have known he has asbestosis, or the date that asbestosis is medically diagnosed, whichever came first.”) (emphasis added); Eagle-Picher Indus., Inc. v. Liberty Mut. Ins. Co., 682 F.2d 12, 16 (1st Cir. 1982) (Under the manifestation theory, coverage is triggered when an injury “first manifest[s] itself by way of medically diagnosable symptoms”); see also Am. Home Prod. Corp. v. Liberty Mut. Ins. Co., 565 F.Supp. 1485, 1489 (S.D.N.Y. 1983) (explaining that manifests “has been defined to mean when the injury was diagnosed or when it produced symptoms that placed or should have placed the injured person on notice”); Keene Corp. v. Ins. Co. of N. Am., 667 F.2d 1034, 1043 (D.C. Cir. 1981) (stating that an injury does not become manifest “until cellular damage advances to the point of becoming a recognizable disease”).
However, the more critical question concerns whether in light of the “first manifest” standard, there are multiple “occurrences” when there are multiple spills, such that the “first manifests” test can apply to each discrete spill. As noted above, the DCE provides, “For purposes of pollution liability, including limits of liability, occurrence is the date on which ‘bodily injury' or ‘property damage' first manifests itself.” Sentry Policies (DCE) § (II)(M) (emphasis added). According to Sentry, “the word ‘first' [] modifies the word ‘manifest[,]'” such that coverage is triggered only if overall PCE contamination in the aggregate at the site first became reasonably discoverable during the policy period. See Sentry Mot. at 9. In Sentry's view, that would be a one-time occurrence. Relying on this interpretation, Sentry argues the PCE contamination at issue is not covered because the overall PCE contamination most likely first manifested before the Policy Period in the early 1980s. See RCR Decl. ¶ 26. In contrast, Casa Nido, relying on Morrow Corp. v. Harleysville Mut. Ins. Co., 101 F.Supp.2d 422 (E.D. Va. 2000), argues that the question is not when PCE contamination in the aggregate first became discoverable, but when each discrete release of PCE first became discoverable, i.e., the point at which each successive release of PCE first manifested itself. See id. at 432-33 (“Simply because there may have been prior damage caused by earlier PCE contamination does not mean that subsequent releases did not cause damage that ‘first manifested itself' at the time of those later releases.”). Sentry counters, asserting “the word ‘first' loses its significance if ‘every iterative discharge' constitutes PCE contamination.” Sentry Reply at 9.
The Court interprets the DCE language consistent with Morrow. At the very least, the language of the policy regarding occurrence is ambiguous and must be read in the insured's favor. Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1032 (9th Cir. 2008) (“In the event of an ambiguity, we must interpret contractual terms to ‘protect the objectively reasonable expectations of the insured.'” (quoting Boghos v. Certain Underwriters at Lloyd's of London, 36 Cal.4th 495, 501 (2005)). The policy language supports Casa Nido's interpretation. The standard BL Policy provides, an “‘[o]ccurrence' means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Sentry Policies (BL Coverage Form) § (F)(9). While the DCE specifies the manifestation trigger for coverage of an occurrence, the basic definition of “occurrence” in the DCE is consistent with that in the BL Coverage Form:
For purposes of pollution liability, including limits of liability, occurrence is the date on which “bodily injury” or “property damage” first manifests itself. The policy in effect at that time, and no other, shall apply to the “bodily injury” or “property damage,” including any enhanced injury or damage resulting from continued or repeated exposure to the same pollutants beyond the policy period.
Sentry Policies (DCE) § (II)(M) (emphasis added). Under both the Policy and the DCE, “property damage” may be said to “occur” when there is a spill which results in contamination of the soil. That property damage can occur each time there is such a spill. Thus, for instance, if there is a spill that occurred one time each year, each yearly spill could be deemed an occurrence. That could be true if spills occurred twice a year, monthly, or weekly.
To be sure, the language “including any . . . damage resulting from continued or repeated exposure of the same pollutants,” Sentry Policies (DCE) § (II)(M), could suggest that each repeated exposure of the same pollutant constitutes a single occurrence. But it need not. As for the plain language, simply because damage resulting from continued or repeated exposure may constitute a single occurrence does not mean it must constitute a single occurrence. And, because the provision appears in the DCE, a portion of the Policy that provides an exception to the pollution exclusion in the standard Businessowners Liability Coverage, it must be construed in favor of the insured. See E.M.M.I. Inc. v. Zurich Am. Ins. Co., 32 Cal.4th 465, 471 (2004) (“[E]xceptions to exclusions are broadly construed in favor of the insured.” (quoting Aydin Corp. v. First State Ins. Co., 18 Cal.4th 1183, 1192 (1998)). Moreover, it appears the explicit purpose of the provision within the DCE is to extend coverage to subsequent discharges that occur outside the Policy Period: “including any enhanced injury or damage resulting from continued or repeated exposure to the same pollutants beyond the policy period.” Sentry Policies (DCE) § (II)(M) (emphasis added). That is, if discharges subsequent to the triggering discharge are continuous or repetitive of the triggering discharge, the subsequent discharges would be covered even if they first manifest outside of Policy Period, as they would be considered part of a single occurrence that first manifested during the Policy Period. Since courts “consider policy language in context to discern its intended function,” McMillin Homes Constr., Inc. v. Nat'l Fire & Marine Ins. Co., 35 Cal.App. 5th 1042, 1050 (2019) (internal citation omitted), a reasonable distinction could be made between an interpretation of “occurrence” which extends coverage in one context from one which limits coverage in another. See MacKinnon v. Truck Ins. Exch., 31 Cal.4th 635, 648 (2003) (“[I]nsurance coverage is interpreted broadly so as to afford the greatest possible protection to the insured.” (citations omitted)). In each instance, ambiguity may be interpreted in the insured's favor. Manzarek, 519 F.3d at 1032.
In any event, even if “occurrence” is interpreted to encompass any repeated or continuous exposure irrespective of context, the term is sufficiently ambiguous to give rise to a factual question whether the timing and frequency of the PCE spillage at the Site during the Policy Period could be deemed “repeated or continuous” within the meaning of the Sentry Policies. There is evidence sufficient to create an issue of fact regarding the nature and timing of the spills here. Casa Nido alleges that “there were sudden and accidental spills and equipment overflows of PCE . . . during the 32-year period that Defendant O'Hanks operated the dry-cleaning business on the Property . . . and these sudden and accidental spills and overflows resulted in PCE being released.” TAC at 4-5. Casa Nido's expert, Mr. Clark-Riddell, opined that “it is more probable than not that the PCE releases at the Site were the result of periodic or ongoing spills and leaks, and possibly one or more sudden and accidental releases” beginning in the 1960's or 1970's, but that “the risk of PCE spills, leaks, and accidental and sudden releases likely continued into the 1980's and 1990's[.]” RCR Decl. ¶ 17. In addition, the underlying complaint and Mr. Clark-Ridell's report allege “sudden and accidental” PCE discharges rather than a continuous pattern. See, e.g., TAC ¶¶ 20, 23, 26; RCR Decl. ¶ 17.
Morrow is persuasive on this point. The policies at issue in Morrow included an exception to a pollution exclusion for damage from “sudden and accidental” discharges of pollution. See Morrow Corp., 101 F.Supp.2d at 430. Sentry argued that the damage was not covered because “the underlying complaint allege[d] not sudden and accidental PCE discharges, but rather a continuous pattern of discharges during the time plaintiffs were in business[.]” Id. at 432. The court was not convinced. It noted that the underlying complaint did not allege that “the PCE discharges occurred as a continuous pattern or that the allegations are limited to such a pattern; instead, [. . .] the underlying complaint uses terms (‘spilled,' ‘discharged,' ‘released') which encompass releases that are sudden and accidental, as well as releases that are part of a continuous pattern.” Id. Thus, while the court noted that “Sentry may ultimately succeed in proving that all or a portion of the Greenbriar settlement is attributable to damages owing to a continuous pattern of PCE pollution that occurred during the 1987-89 coverage period[,]” it concluded that “[a]t this stage, the inquiry is not whether the releases were in fact sudden and accidental, but simply whether the underlying complaint's allegations reasonably included sudden and accidental releases of PCE.” Id.; see also Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1, 19 (Cal. 1995) (“[T]he determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy.”). In essence, Morrow recognized that the dispute at issue rested on a distinction between continuous and repetitive pollution and non-continuous and non-repetitive pollution, and concluded the resolution was a factual question for a later stage. Morrow supports the conclusion that whether the pollution was continuous or repetitive is not a question that can be resolved at the summary judgment stage, but a question of fact.
Finally, contrary to Sentry's claim, the word “first” does not lose “its significance if ‘every iterative discharge constitutes PCE contamination.” Sentry Reply at 9. Rather, the Court's interpretation recognizes that certain discharges might have first manifested before the Policy Period, certain discharges might have first manifested during the Policy Period, and certain discharges might have first manifested after the Policy Period, but only those that first manifested during the Policy Period are covered. Thus, Sentry has a duty to defend claims arising out of those discrete discharges, and only those discrete discharges, for which Casa Nido establishes a possibility of first manifestation during the Policy Period.
2. Duty to Defend
Because there is a question of fact as to whether there were occurrences within the policy period, the question arises when any such occurrences were first manifest, the trigger to coverage here. Typically, the point at which a reasonable insured should have known of the damage or at which the damage became reasonably discoverable would be a factual question reserved for the jury, precluding summary judgment. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). That is the case here, particularly where the issue is Sentry's duty to defend. Casa Nido need only prove that the damage is potentially covered by the policy, not that the damage is actually covered. See Collin v. Am. Empire Ins. Co., 21 Cal.App.4th 787, 803 (1994). To that end, “[I]t is well-established that when ‘coverage depends on an unresolved dispute over a factual question, the very existence of that dispute would establish a possibility of coverage and thus a duty to defend.'” Liberty Surplus Ins. Corp. v. Landmark Am. Ins. Co., No. 17-cv-1401-DMS (AGS), 2018 WL 3413865, at *5 (S.D. Cal. May 29, 2018) (quoting Mirpad, LLC v. Cal. Ins. Guarantee Assn., 132 Cal.App.4th 1058, 1068 (Cal.Ct.App. 2005)). Thus, if Casa Nido can demonstrate the mere possibility that a reasonable insured should have known of at least some PCE contamination during the Policy Period, and said contamination includes a sufficiently discrete incident as to constitute an “occurrence” within meaning of the DCE policy, then there is a potential for coverage and Casa Nido must prevail on its motion for summary judgment as to the duty of Sentry to defend.
Sentry argues that Casa Nido has not established a genuine issue of material fact as to whether the PCE contamination at the Property “first manifest[ed] itself” during the Policy Period or even a possibility of coverage. Sentry's argument hinges almost entirely on Casa Nido's stipulation that it “did not know, nor had any reason to know, before 2016, of the existence of the subsurface contamination.” Fact Stip. ¶ 8. However, this stipulation of fact is not dispositive. The question here is not merely whether Casa Nido should have known of the PCE contamination, but whether a reasonable insured should have known of the PCE contamination. See Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal.4th 645, 674 (1995). For that matter, there is no equally definitive statement about what O'Hanks, the first-party insured, should have known during the Policy Period.
Notably, in addition to the evidence of spills discussed above, Mr. Clark-Riddell notes that the front-end of the observed 275-foot PCE plume is most likely due to a release in 1984 or later. Id. ¶ 26. Further, Mr. Clark-Riddell notes changing practices in the dry-cleaning industry. For example, “In 1976, the Resource Conservation and Recovery Act (RCRA) was enacted to address public concern about the serious problems related to disposal of hazardous wastes.” Id. The CCCEHD performed inspection and compliance reports at the Site in the 1980's and 1990's when O'Hanks operated the business. The earliest CCCEHD report on record is from December 31, 1984, which showed the average PCE waste generation of 25 gallons per month. The report stated that no plan of correction was necessary, presumably meaning that O'Hanks was in compliance with the PCE usage and waste protocols as of December 31, 1984. See CCCEHD Records at 71920. Seven years later, the 1991 CCCEHD report identified the need for improved PCE handling at the Site by recommending employee training, a written contingency/emergency plan, and required accumulation date on labels. See id. at 721-23; RCR Decl. ¶ 17. Given the 1991 report made this finding one year after the Policy Period ended, the possibility certainly exists that O'Hanks and Casa Nido knew, or should have known, of contamination due to their PCE usage and disposal during the years immediately preceding the 1991 report (i.e., during the Policy Period of 1987 to 1990).
The general awareness of the risks of PCE usage in the dry-cleaning industry, the continuing risk of spills in the 1980's and 1990's, the CCCEHD reports, and the fact that the front of the PCE plume is likely the result of a release in 1984 or later suggests a possibility that Casa Nido or O'Hanks should have known of occurrences of PCE contamination and that spills, leaks, and accidental and sudden releases first manifested during the Policy Period.
Thus, Casa Nido has established “a possibility that the claim may be covered by the policy,” Waller, 11 Cal.4th at 19, and Sentry has failed to “negate[] all facts suggesting potential coverage.” Scottsdale Ins. Co. v. MV Transportation, 36 Cal.4th 643, 655 (2005).
Therefore, the Court finds that Sentry has a duty to defend because a possibility of coverage exists under the Policy. The Court GRANTS Casa Nido's motion for partial summary judgment with respect to Sentry's duty to defend Casa Nido and DENIES Sentry's cross-motion for summary judgment as to the same.
B. Defense Costs Coverage Limit
After finding that Sentry has a duty to defend Casa Nido, the next inquiry is whether Sentry's costs of defending Casa Nido are limited to $100,000 pursuant to the DCE. Casa Nido argues that defense costs should not be included in the “Supplementary Payments” provision because § (A)(1)(b) of the Businessowners Liability Coverage Form overrides any separate provisions limiting defense costs. Sentry argues that the DCE expressly limits defense costs to $100,000 that would otherwise not be limited under the “Supplementary Payments” provision.
In this case, the Supplementary Payment provision provides in part: “we will pay, with respect to any claim or ‘suit' we defend: (1) All expenses we incur . . . (4) All reasonable expenses incurred by the insured at our request to assist us in the investigation or defense of the claim or ‘suit'[.]” Sentry Policies (BL Coverage Form) § (A)(1)(e) (emphasis added). A “suit” is defined to mean a civil proceeding in which damages because of . . . ‘property damage' . . . to which this insurance applies are alleged.” Sentry Policies (BL Coverage Form) § (F)(13). As the italicized words indicate, the supplementary payments provision providing “All expenses we incur” is a function of the Sentry's defense obligation. See Prichard v. Liberty Mut. Ins. Co., 84 Cal.App.4th 890, 911 (2000) (“‘We will pay, with respect to any claim or “suit” we defend: [¶] ... [¶] 5. All costs taxed against the insured in the “suit.'” [. . .] As the italicized words indicate, the supplementary payments provision providing all ‘costs taxed' is a function of the insurer's defense obligation, not its indemnity obligation.”). The DCE then provides, however, that a “separate pollution limit of $100,000 applies to all damages, including sums paid under Coverage Extension - Supplementary Payments, for all occurrences during the policy period.” Sentry Policies (DCE) § (II)(M).
Here, Sentry's duty to defend is triggered by the DCE because pollution coverage is otherwise excluded by the Sentry Policies. As such, Sentry's duty is subject to any limitations set forth in the DCE, including the $100,000 limit to coverage of sums paid under Coverage Extension - Supplementary Payments. As noted, the Coverage Extension - Supplementary Payments provides that Sentry “will pay, with respect to any claim or ‘suit' we defend[.]” Sentry Policies (BL Coverage Form) § (A)(1)(e) (emphasis added). It follows, then, that the $100,000 limitation in the DCE applies to Sentry's duty to defend.
The case law is in accord. In Albert D. Seeno Constr. Co. v. Aspen Ins. UK Limited, 17-cv-3765-SI, 2020 WL 5760170 (N.D. Cal. Sept. 28, 2020), the Court held that defense costs are considered “supplementary payments” that erode the policy limits. Id. at *1. Cf. Karsant Fam. Ltd. P'ship v. Allstate Ins. Co., No. C 08-01490 SI, 2009 WL 188036, at *7 (N.D. Cal. Jan. 27, 2009) (finding that identical language refers to the duty to defend and that costs “taxed against the insured” includes attorneys' fees but the costs “of defending any suit” does not include attorneys' fees). In Nat'l Union Fire Ins. Co. v. West Lake Academy, 548 F.3d 8 (1st Cir. 2008), the First Circuit held that an endorsement policy that limits defense costs to $300,000 overrides the general Supplementary Payments provision that on its own does not limit coverage, therefore, defense costs were limited to $300,000. See id. at 17-18.
For the foregoing reasons, the Court DENIES Casa Nido's motion for summary judgment with respect to whether Sentry's costs of defending Casa Nido are limited to $100,000 pursuant to the DCE, and GRANTS Sentry's cross-motion for summary judgment as to the same.
C. Breach of the Covenant of Good Faith and Fair Dealing
Lastly, Sentry seeks summary judgment with respect to Casa Nido's claim that Sentry breached the covenant of good faith and fair dealing. See Sentry Cross-Mot. at 15-16. Casa Nido alleges Sentry breached the covenant when Sentry relied on Montrose to deny Casa Nido's claims and because Sentry failed to adequately investigate whether Casa Nido's claims were covered. See Casa Nido Reply at 13-14.
“To establish breach of the implied covenant [of good faith and fair dealing], the insured must show that: (1) benefits due under the policy were withheld, and (2) such withholding was unreasonable.” O'Keefe v. Allstate Indem. Co., 953 F.Supp.2d 1111, 1115 (S.D. Cal. 2013). Ordinarily, “reasonableness of an insurer's claims-handling conduct is . . . a question of fact [and only] becomes a question of law where the evidence is undisputed and only one reasonable inference can be drawn from the evidence.” Nieto v. Blue Shield of Cal. Life & Health Ins. Co., 181 Cal.App.4th 60, 86 (2010) (citing Chateau Chamberay Homeowners Ass'n v. Associated Int'l Ins. Co., 90 Cal.App.4th 335 (2001)). However, “[w]hen the issue of the insurer's objective reasonableness depends on an analysis of legal precedent, reasonableness is a legal issue” for the court. See CalFarm Ins. Co. v. Krusiewicz, 131 Cal.App.4th 273, 287 (2005).
Whether Sentry breached the covenant of good faith and fair dealing by relying on Montrose to deny Casa Nido's claims is a question of law for the Court. See id. The Court finds that it was reasonable for Sentry to rely on Montrose to deny Casa Nido's claims because, as explained above, the manifestation trigger as defined by Montrose applies to the Sentry Policies. This finding is not impacted by the Court's ultimate determination that Sentry has a duty to defend for a number of reasons. First, Casa Nido has principally argued coverage on a theory that the continuous injury trigger applies to the Sentry Policies, a theory with which the Court disagrees, and Sentry fairly rejected. Second, as explained in the Court's previous order, it was appropriate for Sentry to look to Montrose because it is “not unreasonable to look to dictum from the Supreme Court of California when interpreting California insurance law.” See Docket No. 144 at 9-10 (citing United Steelworkers of Am. v. Bd. of Educ., 162 Cal.App.3d 823, 835 (Ct. App. 1984)). Third, the central basis for the Court's determination that Sentry has a duty to defend is based on an ambiguity in the meaning of “first” in “first manifests,” an ambiguity that even if resolved in Casa Nido's favor still reasonably supports Sentry's interpretation. And as noted above, Casa Nido's claim for coverage if far from compelling. It requires a favorable interpretation of the DCE policy and a construction of the facts drawn in Casa Nido's favor based on a chain of inferences. As such, the Court GRANTS Sentry's motion for summary judgment as to whether its reliance on Montrose to deny Casa Nido's claims constitutes a breach of the covenant of good faith and fair dealing and with respect to the adequacy of its investigation of Casa Nido's claims.
V. CONCLUSION
For the foregoing reasons, the Court GRANTS Casa Nido's motion for partial summary judgment with respect to Sentry's duty to defend Casa Nido and DENIES Sentry's cross-motion for summary judgment as to the same.
The Court DENIES Casa Nido's motion for summary judgment with respect to whether Sentry's costs of defending Casa Nido are limited to $100,000 pursuant to the DCE, and GRANTS Sentry's cross-motion for summary judgment as to the same.
The Court GRANTS Sentry's cross-motion for summary judgment as to whether its reliance on Montrose to deny Casa Nido's claims constitutes a breach of the covenant of good faith and fair dealing and whether its investigation of Casa Nido's claims were sufficiently adequate as to not constitute a breach of the covenant of good faith and fair dealing.
This order disposes of Docket Nos. 148 and 157.
IT IS SO ORDERED.