Insurer's duty to defend gets some definition and refinement.

• Author: Cerillo, William A.
• Position: California

Two important decisions on different aspects of an insurer's duty of defense have been handed down recently by the California Supreme Court. They touch on important areas of this field of law and are likely to be influential in other courts and jurisdictions.

The first, Montrose Chemical Corp. v. Admiral Insurance Co.,(1) resolves the rules that apply to determine whether an obligation of defense exists in third-party liability cases involving continuous or progressively deteriorating damage or injury. The court not only adopted a continuous injury trigger of coverage, but it also extensively discussed the applicability of the loss in progress rule to third-party liability actions. On both issues the court's rulings are significant not only in California but also as possible precedent in other jurisdictions as well.

The second case, Waller v. Truck Insurance Exchange,(2) involved a different aspect of an insurer's obligation of defense - to what extent an insurer is required under the terms of a commercial general liability policy to defend or indemnify a third-party action that seeks incidental emotional distress damages caused by the insured's non-covered economic or business torts. Vacating a $58 million compensatory and punitive award on the ground that insurers are not obligated to provide coverage under CGL policies for bodily injuries, including emotional distress, when the gravamen of a case is only for non-covered economic losses, the court also held that an insurer does not impliedly and automatically waive any defenses it fails to set forth when denying a claim, absent clear and convincing evidence of an intent to do so.

MONTROSE

Montrose is a counterpart to the California Supreme Court's 1990 decision in Prudential@ LMI Commercial Insurance Co. v. Superior Court,(3) in which the court examined the issue of allocation of indemnity among insurers in a first-party property insurance case where the loss occurred over several policy periods but was not discovered until several years after it commenced. In Prudential-LMI, the court applied a manifestation of loss rule, holding that the insurer insuring the property at the time appreciable property damage becomes manifest is solely responsible for indemnifying the insured once coverage is established. The court expressly reserved the question of what rules to apply in third-party liability cases involving continuous or progressively deteriorating damage or injury.

In Montrose, the court resolved the issue it had reserved in Prudential-LMI. Montrose became a defendant in five separate lawsuits arising from the contamination that occurred when Montrose manufactured the pesticide DDT or disposed of its hazardous wastes from 1947 until 1982. Between 1960 and 1986, seven insurers, ending with Admiral, issued CGL policies to Montrose. Admiral issued four policies, covering the period from October 1982 to March 1986. Those policies obligated Admiral to "pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of . . . bodily injury, or . . . property damage to which this insurance applies, caused by an occurrence." "Occurrence" was defined as an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured."

The issue was whether any of seven CGL insurers, including Admiral, were obligated to defend Montrose in the actions against it in connection with Montrose, s disposal of toxic or hazardous wastes. Admiral maintained there was no coverage because there was no "occurrence" while its four policies were in effect and that any contamination predated the inception of its earliest policy. It also contended that Montrose's loss was already in progress when Admiral, s policies began, and there could be no coverage for losses of which Montrose was aware before coverage was obtained.

The trial court found that Admiral had no duty to defend because there was no potential for coverage under its policies, and it granted summary judgment to Admiral. The court stated that coverage was "triggered" when damage was first discovered, and that the injured third parties allegedly discovered contamination no later than August 1982, before the start of Admiral's first policy. It also concluded that coverage was barred under the loss-in-progress rule, which is codified in Sections 22 and 250 of the California Insurance Code. The court relied on a so-called PRP letter Montrose received from the Environmental Protection Agency in August 1982 informing it that it potentially might be responsible for response and other cleanup costs at a specified site. Therefore, prior to the commencement of Admiral's policies, Montrose knew its liability for property damage or bodily injury, or both, stemming from the contamination at the site was "likely."

The California Court of Appeal reversed, rejecting a manifestation of loss or discovery trigger of coverage and concluding that because some of the underlying claims alleged that continuous or progressively deteriorating property damage "occurred" throughout Admiral's policies, potential coverage was triggered for purposes of a duty of defense. The court also held that the loss-in-progress rule did not bar coverage in the underlying cases because, notwithstanding Montrose's receipt of the PRP letter, its potential liability to third parties for the progressive property damage was still "contingent" and thus insurable.

On appeal, the California Supreme Court found two issues presented@ first, when is potential coverage triggered under a CGL policy where the underlying third-party claims involve continuous or progressively deteriorating damage or injury, and second, how is the loss-in-progress rule applied to such policies.

As to the first issue, the court adopted the continuous injury trigger of coverage. "Where, as here," it stated, "successive CGL policy periods are implicated, bodily injury and property damage which is continuous or...