Coverage Analysis
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DAMAGES

In the past, California courts had limited coverage to the insured's tort liabilities  See Waller v. Truck Ins. Exchange, 11 Cal.4th 1 (1995)(no coverage for emotional distress flowing from claims for breach of contract).  In 1999, however, the California Supreme Court  overruled a long line of authority which had suggested that contract damages are per se outside the scope of liability insurance coverage.  The court ruled in Vandenberg v. Superior Court, 21 Cal.4th 615, 982 P.2d 229 (1999) that coverage for “sums which an insured is legally obligated to pay as damages” extends to damages for the insured’s breach of a lease agreement and is not strictly limited to tort damages.  In holding that coverage for property damage losses is not necessarily precluded merely because they are pleaded as contractual damages, the Supreme Court declined to give any special or legalistic meaning to the phrase “legally obligated to pay as damages” and instead concluded that a reasonable lay person would understand that coverage to extend to any obligation which is binding and enforceable under the law, whether pursuant to contract or tort liability.

Under California law, contract damages are generally limited to “ those within the contemplation of the parties when the contract was entered into or at least reasonably foreseeable by them at that time...In contrast, tort damages are awarded to fully compensate the victim for all injuries suffered.”  Erlich v. Menezes, 21 Cal. 4th 543, 550 (1999).

Earlier, i the Second District had ruled in Truck Ins. Exchange v. Superior Court, 62 Cal. App.4th 789, 72 Cal. Rptr.2d 851 (2d Dist. 1998) that a CGL insurer has no obligation to afford coverage for a general contractor's negligent failure to meet a contractual deadline for completion of the construction project.  In such circumstances, the Second District declared that the insured's obligations did not arise by operation of law.  Rather, the court held that the insured's liability was "imposed by contract" and was outside the scope of the CGL policy.  The fact that the insured's liability might have resulted from a negligent breach of the insurance contract was irrelevant and otherwise would make the insurer a "silent business partner subject to great risk in the economic venture without any prospects of sharing in the economic benefit."

The Supreme Court of California ruled in 1990 that Superfund "response costs" are "damages." AIU Ins. Co. v. FMC Corp., 51 Cal.3d 807, 274 Cal. Rptr. 820, 799 P.2d 1253 (1990).  Further, costs which may be incurred in mitigating or preventing the spread of harm will also be covered.  Coverage will only be inapplicable where no discharges have occurred at all and there is only a threat of pollution (no "property damage").  

A subsequent ruling of the California Court of Appeal interpreted AIU as encompassing all out of pocket expenses arising out of covered claims, whether in the form of injunctive remedies or compensatory damage claims.  City of Pomona v. Employers Surplus Line Ins. Co., 4 Cal. App.4th 818, 5 Cal. Rptr.2d 910 (1992)(civil rights claims under 42 U.S.C. §1983).  However, the Supreme Court of California later ordered City of Pomona depublished, presumably in view of its holding in Bank of the West v. Industrial Indemnity Co., 2 Cal. 4th 1254, 10 Cal. Rptr.2d 538, 833 P.2d 545 (1992) that remedies that are not "compensatory" in character are not "damages" upholding an earlier line of cases which had held that the costs of complying with injunctive relief and other forms of non-compensatory relief are not "damages."  Home Indemnity Co. v. Avol, 706 F.Supp. 728 (C.D. Cal. 1989), aff'd mem., 912 F.2d 469 (9th Cir. 1990)(injunctive claims against landlord); Perzik v. St. Paul Fire & Marine Ins. Co., 228 Cal. App.3d 1273, 279 Cal. Rptr. 498 (1st Dist. 1991)(criminal sanctions against doctor);  Jaffe v. Cranford Ins. Co., 168 Cal. App.3d 930, 214 Cal. App. 567 (1985)(medicare fraud); Nationwide Ins. Co. v. King, 673 F.Supp. 384 (S.D. Cal. 1987)(suit to enjoin property owner from removing air conditioner).   However, the Ninth Circuit has since ruled that these cases are no longer good law, having been decided before AIU and City of Pomona.  Thus, in Scottsdale Ins. Co. v. Avol, 972 F.2d 1342 (9th Cir. 1992), the Circuit Court ruled that Avol was not collaterally estopped by the court's earlier ruling from securing coverage for an award of attorneys fees in the injunctive proceedings against him by his tenants.

On February 1, 2001,  the Supreme Court ruled in Certain Underwriters at Lloyd’s v. Superior Court, 21 Cal.4th 545 (Cal. 2001) that policies that insured damages that the insured is “legally obligated” to pay only extend coverage to sums that the insured is ordered to pay by a court judgment and, consistently with its ruling in Foster-Gardner,  specifically do not encompass “expenses required by an administrative agency pursuant to an environmental statute.”
 
A federal district court ruled in Tsakopoulos v. American Manufacturers Mutual Insurance Company, 2000 U.S. Dist. LEXIS 18569 (E.D. Cal. August 9, 2000) that insurers were required to reimburse a polluter for restorative costs that the insured agreed to undertake  in order to avoid being forced to pay a $1 million penalty for violations of the Clean Water Act.

Outside of the environmental context, California courts have generally refused to require coverage for the cost of complying with injunctive orders.  See e.g., Cutler-Orosi Unified School District v. Tulare County School District Self-Insurance Authority, 31 Cal. App. 4th 617, 37 Cal. Rptr.2d 106 (1994)(action under Voting Rights Act to enjoin racial discrimination in means by which school board members are elected was not a claim for "damages"). The California Court of Appeal  ruled in Bullock v. Maryland Casualty Company, 2001 Cal. App. LEXIS 10 (1st Dist. January 8, 2001) that litigation between a property developer and the City of San Francisco with respect to the proposed conversion of residential property into a hotel was not covered under various CGL policies issued to the developer since the injunctive relief sought by the City was not a claim for “damages.” The court refused to find coverage merely based upon the possibility that the City’s complaint could have been amended to pay certain mitigation costs for the removal of residential units from the housing market, nor was the court persuaded that “damages” could include civil penalties or the cost of appointing a receiver.   The court declined to analogize costs of mitigation as being akin to the environmental claims in AIU.

Also, notwithstanding AIU, some California courts have refused to find coverage for routine testing costs and other purely prophylactic or regulatory measures. ACL Technologies, Inc. v. Northbrook Property & Cas. Ins. Co., Orange No. X-61-95-76 (Cal. Super. September 23, 1991), aff'd on other grounds, 22 Cal. Rptr.2d 206 (Cal. App. 1993).

The California Court of Appeal has ruled that a settlement that a housing developer entered into prior to the institution of any actual litigation against it was not binding upon its insurance company as these were not sums that the additional insured was “legally obligated” to pay.  In San Diego Housing Commission v.  Industrial Indemnity Co., 68 Cal. App.4th 526 (4th Dist. 1998), review denied (Cal. February 24, 1999) the court held that costs incurred by the San Diego Housing Commission to repair public housing conditions were not legal damages as no suit had been filed by building tenants, nor did the court find legal liability based upon claimed statutory requirements imposed by the U.S. Department of Housing and Urban Development.

The fact that a claimant was made whole by reason of payments from a third party did not provide a basis for the insurer contending that he had not suffered any damages.  Hughes, 199 Cal. App. 2d at 249-250; 

An insurer had no obligation to indemnify its insured for attorney's fees that were awarded against the policyholder in the underlying tort action based upon a California statute (CCP §1021.4) that permits fees to be awarded where the defendant has been convicted of a felony.  Baker v. Mid-Century Ins. Co., G013296 (Cal. App. November 30, 1993).

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