In September, we reported on the September 7, 2010 oral argument before the California Supreme Court in Ameron International v. Insurance Company of the State of Pennsylvania. The prior report includes a detailed factual discussion, but the key issue in Ameron is whether an administrative proceeding initiated by the filing of a complaint and culminating in a 22 day trial before a federal administrative law judge constitutes a “suit” that triggers insurance coverage under a commercial general liability policy which does not define the term. We also noted that a majority of the court appeared to be open to including matters that are actually adjudicated within the definition of “suit,” even if the proceeding does not take place in a courtroom.

On November 18, 2010, the California Supreme Court issued a unanimous opinion authored by Justice Chin, holding that a “quasi-judicial administrative proceeding, employed to resolve government demands against insured parties, is a ‘suit’ as a reasonable insured would understand that term.” To reach this conclusion, the court examined in-depth the similarities between the United States Department of Interior Board of Contract Appeals (“IBCA”) proceeding at issue and a trial in a courtroom. The court emphasized that IBCA proceedings are initiated by a complaint (albeit a complaint filed by the contractor/policyholder), which adequately “inform[s] the insurer of the nature of the dispute so that it can determine its defense duties under the insurance policy.” The IBCA also has authority to conduct trials, determine liability, and award money damages. In addition, the court cited a provision in the applicable Contract Dispute Act, 41 U.S.C. § 609(d), which refers to both administrative and court proceedings as “suits.”

Based on these factors, the court determined that the term “suit” was ambiguous, and held that “a reasonable policyholder would believe that a policy providing coverage for a ‘suit’ would provide coverage for the IBCA proceedings.”

This holding is significant since it departs from and limits the Supreme Court’s 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. At that time, the Supreme Court announced 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 . . . .” Justice Kennard, who dissented in Foster-Gardner, filed a concurring opinion in Ameron and stated her opinion that the court should have simply overruled Foster-Gardner.

Although Foster-Gardner still applies to agency orders, or claims that involve only threats to take legal action, its holding no longer applies to administrative agency adjudicative proceedings. For example, a policyholder who receives an environmental remediation order from the California Department of Toxic Substances Control (“DTSC”) and fails to comply with the order may be pursued by DTSC either administratively or civilly. In the administrative forum, DTSC serves an administrative complaint on the policyholder which then triggers the policyholder’s right to request an administrative appeal with California’s Office of Administrative Law. The appeal process is governed by California’s Administrative Procedures Act, which provides for some pre-hearing discovery and a hearing where the parties may call and examine, cross-examine and impeach witnesses, introduce exhibits, and rebut any evidence. Drawing the analogy from Ameron, the quasi-judicial proceeding before an ALJ could be similarly argued to be a “suit” triggering coverage.

Insureds have also always had the option, of course, to respond to their potential liability by initiating litigation against other potentially responsible parties (“PRPs”), which typically brings to issue the liability of the insured, and thereby triggers the duty to defend. Ameron opens up the possibility that an insured can respond to a claim or order from the government and trigger the duty to defend by initiating its administrative adjudicatory rights or by filing suit against that governmental entity or other PRPs. As the Supreme Court stated, “Although the contractor thus initiates the IBCA proceeding, the purpose of the proceeding is to resolve the claim against the contractor, who is therefore in the position of a defendant. The factual issues are then framed for adjudication by the pleadings, which consist both of the contractor’s complaint and the government’s answer.” Accordingly, policyholders should evaluate their potential claims under CERCLA or applicable state laws, as well as the potential for declaratory relief.

The decision in Ameron also impacts another case pending before the California Supreme Court, Clarendon American Ins. Co. v. Starnet Ins. Co. In Clarendon, the Court of Appeal held that the term “suit” obligates an insurer to defend against the mandatory Calderon dispute resolution process in construction defect cases (further discussion can be found in our prior report). Clarendon involved different policy language than Ameron, and the Court of Appeal’s decision involved a straightforward application of Foster-Gardner that should not be affected by the Ameron decision. Nevertheless, on November 18, 2010, the California Supreme Court granted Starnet’s petition for review, but deferred further action “pending consideration and disposition of a related issue” in Ameron. Although it remains to be seen, now that the court has decided Ameron, it seems likely that it will affirm the Court of Appeal’s decision in Clarendon, or remand so that the Court of Appeal can review its decision in light of Ameron.