Brownfields: Insurers Might Be on the Hook for Hazardous Waste Cleanup
Insurance companies might have to pay hundreds of millions of dollars to clean up the Stringfellow Acid Pits, a notorious toxic waste dump in Riverside County, the Fourth District Court of Appeal has ruled.
In a complex ruling that combines state water law with liability insurance coverage definitions, the court ruled that the State of California "owns" all of the groundwater under the surface of the state, but not within the traditional definition of property ownership. Thus, the ownership exclusion of typical liability insurance policies does not apply, the court ruled.
"The State ‘owns' the groundwater in a regulatory, supervisory sense, but it does not own it in a possessory, proprietary sense," Justice Art McKinster wrote for the unanimous three-judge panel. "This being so, it is apparent that the ‘owned property' exclusion, which we believe we can safety say normally applies to property owned by the insured in the manner defined by the Civil Code, is not clearly applicable here."
The appellate panel reversed a Riverside County trial court ruling and remanded the case for further proceedings "to resolve the ambiguity inherent in the policy language."
Jennifer Hernandez, a brownfields attorney for Beverage & Diamond in San Francisco, said the ruling probably does not have a significant effect on other brownfields cases. "Stringfellow remains the poster child for the complicated, very litigious site," said Hernandez, who is not involved in the lawsuit.
She noted, though, that insurance companies and landowners in other states have tried to escape liability for pollution of groundwater on the basis that they only insured (or owned) the surface property. That argument, just now making its way to California, has failed elsewhere, Hernandez said.
The Stringfellow site was a state-licensed facility where industries dumped millions of gallons of liquid wastes for nearly 20 years until 1972. Various parties have been arguing about who is responsible for cleaning up the site, which is on the federal Superfund list, since the 1980s. The estimated cleanup costs have reached $500 million. In 1995, a federal district court ruled that the state is mostly liable for the cleanup. The state has since turned to companies that issued various insurance policies, leading to the lawsuit considered by the Fourth District.
At the trial court, insurance companies convinced Superior Court Judge Stephen Cunnison that the "owned property exclusion" existed in this case. Under that principle, an insured does not receive payment for loss or damage to property it owns. (For example, automobile liability insurance does not cover the insured person's vehicle; for that, the motorist needs collision and comprehensive coverage.) Because Cunnison ruled that the state owned all the groundwater, the state's insurance companies were not liable for the expensive cleanup of Stringfellow.
On appeal, the state argued that state Water Code §102 and Civil Code §§669-670 establish more of a philosophical view, rather than a proprietary interest in the water. Hence, the owned property exclusion would not apply.
The appellate court agreed, saying that what matters in California is not water ownership but water rights. Several cases have made clear that although the state has the supervisory authority to regulate water, the state is bound by the same water rights regulations that apply to private landowners, the court ruled. In other words, the state cannot simply assert ownership and take all the water it wants.
"Read in context with provisions and decisional law relating to water use, the Water Code provisions simply do not result in anything recognizable as ‘ownership' as the term is commonly understood," McKinster wrote.
"[T]he state's power under the Water Code is the power to control and regulate use; such a power is distinct from the concept of ‘ownership' as used in the Civil Code and in common usage," McKinster continued.
The Case:
State of California v. Superior Court of Riverside County, No. E025472, 00 C.D.O.S. 1704, 2000 Daily Journal D.A.R. 2281, filed March 1, 2000.
The Lawyers:
For the state: Darryl Doke, supervising deputy attorney general, (916) 324-5374.
For Underwriters at Lloyds of London: John Holmes, Barger & Woven, (213) 680-2800.