Does an administrative proceeding initiated by the filing of a complaint and culminating in a 22 day trial before a federal administrative law judge constitute a “suit” that triggers insurance coverage under a commercial general liability policy? The California Supreme Court heard argument on the following issue this week in Ameron International v. Insurance Company of the State of Pennsylvania:

Does a proceeding before the United States Department of the Interior Board of Contract Appeals constitute a “suit” such as to trigger insurance coverage under a commercial general liability policy?

Ameron, under a subcontract with Peter Kiewit Sons Co., constructed large pipes for an aqueduct which carries water from the Colorado River to cities in Arizona between 1975 and 1980. In 1990, the Contracting Officer of the U.S. Bureau of Reclamation determined that the pipes were defective. Ameron contested the decision by filing a Complaint before the U.S. Department of Interior Board of Contract Appeals in 1995. The Bureau of Reclamation filed an Answer and Counterclaim in 1996. The matter proceeded to trial in 2000, and Ameron ultimately settled with the government in 2003.

Ameron requested that its carriers defend it against the Bureau of Reclamation’s Counterclaim, and all but one insurer denied the duty to defend. In April 2003, Ameron filed a complaint against its carriers for breach of the duty to defend and breach of the duty to indemnify.

Ameron had purchased numerous policies, some of which defined the term “suit” while others did not. The trial court sustained demurrers filed by the insurance companies, finding that the Board of Contract Appeals litigation was not a “suit” under either type of policy. As to the policies that defined the term “suit,” or included an obligation to indemnify for money other than “damages,” the Court of Appeal reversed the trial court and remanded for further proceedings. Neither party appealed the rulings with respect to these policies. The Court of Appeal affirmed the trial court for the policies that did not define “suit,” and Ameron filed a petition for review. Accordingly, the only policies before the Supreme Court were issued prior to 1986 and do not define the term “suit.”

The Ameron case has drawn attention from insurance companies and policyholders alike because it calls for the Supreme Court to revisit its 1998 opinion in Foster-Gardner v. National Union Fire Ins. Co. In Foster-Gardner, a divided court held that a notice issued by an administrative agency identifying the recipient as a party potentially responsible for environmental pollution, and ordering the recipient to clean-up the pollution, is not a “suit” that triggers an insurance carrier’s duty to defend under a CGL policy. The Supreme Court also established a bright-line rule: when the insurance policy does not otherwise define the term “suit,” “a ‘suit’ is a court proceeding initiated by the filing of a complaint . . . .”

At oral argument, Ameron argued that the Supreme Court can distinguish or “clarify” Foster-Gardner based on the facts. Foster-Gardner involved only a PRP notification letter and order, while this case was initiated by the filing of a complaint, and included a trial before an administrative agency acting in a judicial capacity. Ameron also pointed to a provision in the applicable Contract Dispute Act, 41 U.S.C. § 609(d), which refers to both administrative and court proceedings as “suits.” According to Ameron, a policyholder would reasonably expect coverage for a proceeding that involves a trial in either venue under a policy that obligates the carrier to defend “suits.” The insurance carriers emphasized the “bright-line” rule of Foster-Gardner: put simply, the Board of Contract Appeals is not a court, and a proceeding before it is not a “suit”. Ameron had a choice between going to court or proceeding to arbitration. This choice was important, according to the carriers, because selecting arbitration meant that the judge was a representative of one of the parties rather than a neutral (this contention was disputed), and the government had no right to appeal.

Justice Kennard, who wrote the dissent in Foster-Gardner, was the most active of the Justices. Although it was not clear what direction she was heading, she repeatedly pressed Ameron’s counsel how they get around Foster-Gardner since the decision left little room for maneuvering, and this case does not involve a complaint filed in a court of law. Ameron invited the court to overrule or limit Foster-Gardner­, arguing that bright-line tests can be wrong, or can at least be arbitrary based on the facts.

On the other hand, Justice Kennard pressed the carrier’s counsel on a couple of points related to the insured’s reasonable expectations. First, she asked why a complaint filed before the Board of Contract Appeals should be treated differently from a complaint filed in court. Second, she cited the statutory reference to proceedings before the Board of Contract Appeals as “suits.” The carriers dismissed this latter point as a “scrivener’s error.”

Other Justices, including Justice Werdegar, who joined the dissent in Foster-Gardner, and Justice Moreno, also seemed amenable to limiting Foster-Gardner to agency orders, or creating an exception for actual adjudications outside of a “court of law.” Justice Moreno’s questions expressed a view that coverage should not necessarily depend on the form of the action. He also raised the policy concern that parties might be discouraged from electing arbitration or other forms of alternative dispute resolution if cases involving actual adjudications do not fall within an insurance policy’s definition of “suit.”

Similarly, Justice Chin, who was part of the majority in Foster-Gardner, recognized that it might be possible to carve out a narrow exception for “adjudications.” Ameron’s counsel may have given Justice Chin some comfort with this position when he assured the court that subsequent decisions, such as Powerine, would not be impacted by an exception for cases that were actually adjudicated since they all involved PRP notification letters. Justice Corrigan recused herself from this case, and Associate Justice Peter Siggins of the California Court of Appeal, First District, heard the argument in her place. At one point, Justice Siggins asked Ameron’s counsel whether Ameron had the same choice to litigate as the insured had in Foster-Gardner. Ameron acknowledged that it had the opportunity to litigate, but it should not matter since the result was an adjudication of the issues.

The court will publish its opinion within 90 days of September 7, 2010.