On March 9, 2009, the California Supreme Court issued its decision in State of California v. Allstate Insurance Co., Case No. S149988. In this unanimous decision, the court resolved several issues in favor of the policyholder regarding the application of pollution exclusion provisions in the State's comprehensive general liability insurance policies. The case arises out of the State of California's liability for environmental contamination at the "Stringfellow Acid Pits," a state designed and operated waste-disposal facility in Riverside County, California.

First, the Court addressed the relevant "discharge" for determining whether the "sudden and accidental" exception to the pollution exclusion applied and, therefore, reinstated coverage that otherwise would have been excluded. The contamination at issue was caused by the escape into the environment of pollutants placed into containment ponds on the site. The court affirmed the Court of Appeal's decision that the relevant discharge for purposes of determining whether the discharge was "sudden and accidental" is the release of waste from the containment ponds, rather than the initial disposal of waste into the ponds, as the insurers argued.

The court reasoned that the state was not held liable for polluting the ponds, but for polluting land and groundwater outside the ponds. The court determined that the analysis must focus on the discharge that formed the basis for the insured's liability. This ruling is significant because it is very difficult for an insured to prove that the initial discharge of materials into a containment area, such as a holding pond, was "sudden and accidental," while establishing a "sudden and accidental" discharge from containment is often a much easier proposition.

Second, the court addressed whether an "absolute" pollution exclusion for discharges "into or upon any watercourse" precluded coverage. The court held that there were triable issues of fact that precluded one of the insurers from obtaining summary judgment on this issue. The court held that insurers have the burden of proof to show the watercourse exclusion applies, and to meet this burden they must establish that a discharge was restricted entirely to a watercourse and did not also flow onto and contaminate areas of land below the site.

Third, the court held that where there is a threatened "sudden and accidental" release of contaminants, the pollution exclusion does not bar coverage for liability arising from intentional releases performed in order to prevent a greater accidental release. In doing so, the court upheld the principle that liability policies cover damages resulting from an act undertaken to prevent a covered source of injury from happening, even if the act itself otherwise would not be covered. The court cited and approved of cases holding that there was coverage for costs incurred to prevent further damage, such as fire suppression costs, or costs incurred to prevent environmental damage from spreading. The court also made clear that the insured's failure to take a measure to prevent a release does not mean that coverage is precluded because such an omission demonstrates only negligence, and negligence is insured under the policies.

Fourth, and perhaps most significant, the court held that where indivisible property damage is caused by a combination of covered "sudden and accidental" releases and non-covered releases, the insured does not have to prove the amount of property damage caused by the covered releases. Relying on its prior decision in State Farm Mut. Auto. Ins. Co. v. Partridge (1973) 10 Cal.3d 94, the court held that whenever an insured risk constitutes a proximate cause of an injury, coverage exists even if an excluded risk also was a concurrent proximate cause. The court rejected contrary holdings in two California Court of Appeal decisions, Golden Eagle Refinery Co. v. Associated Internat. Ins. Co. (2001) 85 Cal.App. 4th 1300 and Lockheed Martin Corp. v. Continental Ins. Co. (2005) 134 Cal.App.4th 187. These two decisions have been used by insurers in arguing that policyholders had to prove that specific items of environmental contamination were tied to particular covered releases. As anyone familiar with environmental contamination claims knows, such an exercise would be daunting at best.

This unanimous decision signals a further trend toward a more favorable climate for policyholders in the California courts, particularly with regard to environmental liability claims.