We are called on to decide whether, under comprehensive general liability (CGL) insurance policies issued by petitioners (insurers) to real party in interest FMC Corporation (FMC), insurers are obligated to
We reverse the decision of the Court of Appeal. The insurance policies at issue provide coverage to FMC for all sums FMC becomes legally obligated to pay as "damages" (under two policy forms) or "ultimate net loss" (under a third) because of property damage. Under established principles of contract interpretation, we construe policy language according to the mutual intentions of the parties and its "plain and ordinary" meaning, resolving ambiguities in favor of coverage. Applying these rules, we conclude that the policies cover the costs of reimbursing government agencies and complying with injunctions ordering cleanup under CERCLA and similar statutes. Although many of the policies contain exclusions arguably relevant to whether environmental cleanup costs are covered, we do not consider the applicability of exclusions in this case, which comes to us on motion for summary adjudication solely as to the coverage clauses. (See post, pp. 816-817.)
I. FACTUAL AND PROCEDURAL BACKGROUND
A. THE INSURANCE POLICIES
FMC holds over 60 primary and excess CGL policies issued by the insurers. Each policy contains one of three coverage clauses:
1. Policies issued by the Liberty Mutual Insurance Company and others provide coverage to FMC for "all sums which [FMC] shall become legally obligated to pay as damages because of ... property damage to which this policy applies."
2. Policies issued by the FMC Insurance Company and others provide coverage to FMC for "all sums which [FMC] shall become obligated to pay by reason of the liability ... imposed upon [FMC] by law ... for damages on account of ... property damage...."
3. Policies issued by the First State Insurance Company and others provide coverage to FMC for "all sums which [FMC] shall be obligated to
These coverage provisions were adopted verbatim from standard CGL policies used by the insurance industry. (See Mountainspring, Insurance Coverage of CERCLA Response Costs: The Limits of "Damages" in Comprehensive General Liability Policies (1989) 16 Ecology L.Q. 755, 759; Chesler et al., Patterns of Judicial Interpretation of Insurance Coverage for Hazardous Waste Site Liability (1986) 18 Rutgers L.J. 9, 53.) They contain several common elements. Each provision covers only sums that FMC is "legally obligated" or "obligated ... by law" to pay. They each require that the sums paid be the result of FMC's liability for "property damage[s]." The first two policies limit coverage to sums paid as or for "damages." None of these terms is defined in any of the policies.
B. THE THIRD PARTY SUITS AGAINST FMC
The United States and local administrative agencies (hereafter agencies) filed suits against FMC, seeking relief for alleged violations of CERCLA, the Resource Conservation and Recovery Act (RCRA) (42 U.S.C. § 6901 et seq.), the Clean Water Act (33 U.S.C. § 1251 et seq.), the Safe Drinking Water Act (42 U.S.C. § 300f et seq.), and California's Hazardous Substance Account Act (Health & Saf. Code, § 25300 et seq.). In sum, the suits allege that FMC is responsible for the contamination of 79 different hazardous waste disposal sites, groundwater beneath the sites, aquifers beneath adjoining property, and surrounding surface waters. The agencies seek two types of relief: (i) injunctions compelling FMC both to terminate disposal of further hazardous waste and to remove contaminants already present on
All of the statutes on which the third party suits are based expressly authorize injunctive relief. (See CERCLA, 42 U.S.C. § 9606(a); RCRA, 42 U.S.C. § 6973(a); Clean Water Act, 33 U.S.C. § 1364(a); Safe Drinking Water Act, 42 U.S.C. § 300i(a); Hazardous Substance Account Act, Health & Saf. Code, § 25358.3, subd. (a).) CERCLA and the Hazardous Substance Account Act, however, also authorize government recovery of the costs of removing hazardous waste and restoring affected property, providing the agencies with a choice (subject to judicial approval) of how to proceed with and finance cleanup efforts. (See CERCLA, 42 U.S.C. § 9607(a)(4)(A) [reimbursement of government costs of removal or remedial action]; Hazardous Substance Account Act, Health & Saf. Code, § 25360 [reimbursement of state cleanup expenses].) In addition, CERCLA authorizes the federal government to recover sums for "damages to natural resources." (42 U.S.C. § 9607(a)(4)(C).) In their present suits against FMC, however, the agencies do not seek recovery under this last provision, although surface and groundwater nominally owned by the state (Wat. Code, § 102) has been damaged at many of the sites where remedial action is sought, and although CERCLA defines "natural resources" to include water and groundwater "belonging to, managed by, held in trust by, appertaining to, or otherwise controlled by" the federal or state government.
C. THE PRESENT SUIT
In the present suit, FMC seeks declaratory relief establishing that the CGL policies cover costs it may become obligated to pay as a result of injunctive relief and/or reimbursement ordered in the third party suits. The insurers moved for summary adjudication, asserting that, as a matter of law, the CGL policies do not cover costs of abating and cleaning up hazardous waste and reimbursing governmental agencies for their cleanup efforts.
The superior court denied the insurers' motion for summary adjudication and granted FMC preliminary discovery. Contrary to the insurers' contentions, the court reasoned that CGL policy language should be construed broadly and nontechnically, as ordinary principles of insurance policy interpretation direct. In this light, environmental cleanup costs, whether incurred directly by FMC pursuant to injunction or reimbursed to the government agencies, constitute "damages" and "ultimate net loss" which FMC will be "legally obligated" to pay because of "property damage." The court concluded it was immaterial that in strict legal terms FMC's obligation to incur costs pursuant to injunction will arise from the federal courts' exercise of "equitable" rather than "legal" authority, or that its reimbursement of government expenses can arguably be considered "restitution" rather than "damages."
The Court of Appeal reversed, issuing a peremptory writ of mandate directing the superior court to vacate its order denying summary adjudication of issues, and to enter in its place a new order granting such motion. Adhering to the position taken by two federal Courts of Appeals (Continental Ins. v. Northeastern Pharmaceutical (8th Cir.1988) 842 F.2d 977, cert. den. 488 U.S. 821 [102 L.Ed.2d 43, 109 S.Ct. 66] (hereafter NEPACCO); Maryland Cas. Co. v. Armco, Inc. (4th Cir.1987) 822 F.2d 1348, cert. den. 484 U.S. 1008 [98 L.Ed.2d 654, 108 S.Ct. 703] (hereafter Armco)), the court held that public policy considerations demand that the CGL policies be read technically, precluding coverage of the cost of "prophylactic" measures ordered under the equity jurisdiction of the courts. The court distinguished what it perceived to be the facts of this case — government action seeking to compel cleanup of FMC's own land — from situations in which waste has spread to property owned by the government or third parties.
We granted review to determine whether the Court of Appeal correctly directed the superior court to enter summary adjudication for the insurers.
At issue here is whether, as a matter of law, the CGL policies cover either or both of the types of costs that FMC may be required to pay as a result of the third party suits. Specifically, we must determine whether (i) any adverse orders issued in those suits will "legally obligate" FMC to pay such costs, (ii) the costs will constitute "damages" or "ultimate net loss," and (iii) such costs will be incurred because of "property damage." Only if all three conditions are fulfilled will the insurers' duty to provide coverage arise under the policies.
Our task has two distinct parts. First, we must determine, under California law, what rules of insurance policy interpretation apply in this context. Second, we must interpret the CGL policies under applicable principles of insurance coverage. Although one can readily conceive of arguments for and against permitting insurance against the costs of rectifying pollution, at the outset we note that such arguments are not pertinent to either of our inquiries in this case. Both CERCLA and the Hazardous Substance Account Act expressly permit responsible parties to insure against the costs of relief available under the legislation. (See CERCLA, 42 U.S.C. § 9607(e); Health & Saf. Code, § 25364.) Thus, because Congress and the Legislature already have made the relevant public policy determinations, the issue before this court is not whether CGL policies may provide the coverage sought, but whether they do provide it according to their terms. The answer is to be found solely in the language of the policies, not in public policy considerations.
Numerous state and federal courts have addressed the issue presented in this case. Until the present Court of Appeal decision, nearly every state appellate decision has concluded that cleanup costs incurred under environmental statutes are covered by policies identical to those concerned here.
These decisions have generally held that the costs of reimbursing governments or third parties for their remedial and mitigative efforts are covered, either because such costs are plainly "damages" that the insured is "legally obligated" to pay as a result of "property damage" (see, e.g., Boeing, supra, 784 P.2d at p. 511; Broadwell Realty v. Fidelity & Cas., supra, 528 A.2d at p. 82), or because these phrases are ambiguous and therefore must be resolved in favor of coverage under ordinary rules of insurance policy interpretation (see, e.g., Aerojet, supra, 211 Cal. App.3d at p. 226; Specialty Coatings, supra, 535 N.E.2d at p. 1080). We have found only one state appellate decision holding to the contrary. (See Braswell v. United States Fidelity & Guar. Co. (1989) 300 N.C. 338 [387 S.E.2d 707].)
Similarly, state courts have consistently held costs of compliance with environmental injunctions covered, either because such costs fit within a broad definition of "damages" (see, e.g., Specialty Coatings, supra, 535 N.E.2d at pp. 1080-1081; Waste Manag. of the Carolinas, Inc. v. Peerless Ins. Co., supra, 323 S.E.2d at p. 735), or because a contrary holding would unreasonably make coverage hinge on the "mere fortuity" of which recovery mechanism (injunction, reimbursement, or "damages to natural resources") the government selects in enforcing CERCLA. (See, e.g., United States Aviex Co. v. Travelers Ins. Co., supra, 336 N.W.2d at p. 843.) Again,
The federal courts, however, purporting to apply state law, are sharply divided on whether environmental cleanup costs are covered by CGL policies. Several courts have followed the majority of state decisions, concluding that both forms of relief sought by the government in statutory environmental suits constitute "damages" covered under the standard policies. (See, e.g., Avondale Industries, Inc. v. Travelers Indem. Co. (2d Cir.1989) 887 F.2d 1200 [insurers' duty to defend suits seeking reimbursement of response costs]; National Indemnity Co. v. U.S. Pollution Control Inc., supra, 717 F.Supp. 765; Chesapeake Utilities Corp. v. American Home Assur. (D.Del. 1988) 704 F.Supp. 551; Intel Corp. v. Hartford Acc. and Indem. Co. (N.D.Cal. 1988) 692 F.Supp. 1171, app. pending 9th Cir. (Intel); New Castle County v. Hartford Acc. & Indem. Co. (D.Del. 1987) 673 F.Supp. 1359; Gloucester TP v. Maryland Cas. Co., supra, 668 F.Supp. 394; U.S. v. Conservation Chemical Co. (W.D.Mo. 1986) 653 F.Supp. 152.)
Other courts, however, have ruled that cleanup costs are not covered. These decisions all rely on one or more of four basic arguments. First, looking to the language of CERCLA itself, they often emphasize that because it contains separate provisions for government recovery of "damages" to natural resources (see 42 U.S.C. § 9607(a)(4)(C)) and of "remedial costs" compensating it for cleanup (id., § 9607(a)(4)(A)), the latter form of recovery cannot be classified as "damages," notwithstanding whether state law principles would permit such a characterization in the absence of the statutory distinction. (See, e.g., NEPACCO, supra, 842 F.2d at p. 986; Mraz v. Canadian Universal Ins. Co., Ltd. (4th Cir.1986) 804 F.2d 1325, 1329; Verlan, Ltd. v. John L. Armitage & Co. (N.D.Ill. 1988) 695 F.Supp. 950, 954; Travelers Ins. Co. v. Ross Elec. of Washington, Inc. (W.D.Wash. 1988) 685 F.Supp. 742, 744.)
Second, some courts have held, as the Court of Appeal did in this case, that because the agencies may recover their response costs without having suffered harm to property or resources in which they have a proprietary interest, such recovery is not for "damages," as that term is defined at law. (See, e.g., Mraz v. Canadian Universal Ins. Co., Ltd., supra, 804 F.2d at p. 1329; Aetna Cas. & Sur. v. Gulf Resources & Chem. Corp. (D.Idaho 1989) 709 F.Supp. 958, 962.)
Third, several decisions conclude that "damages," defined either in lay or legal terms, is an unambiguous term that does not include costs of complying with injunctive relief available under CERCLA and related statutes. Such costs, they reason, are not sums paid to another party to compensate it
Fourth, several courts have reasoned that the costs of injunctions and reimbursement are not covered because, in the corporate "insurance context," insureds should not receive the benefit of insurance policy interpretation principles designed to protect unsophisticated, arguably disadvantaged policyholders. (See, e.g., NEPACCO, 842 F.2d at pp. 985-986; Armco, supra, 822 F.2d at p. 1352; Hayes v. Maryland Cas. Co. (N.D.Fla. 1988) 688 F.Supp. 1513, 1515; Travelers Ins. Co. v. Ross Elec. of Washington, Inc., supra, 685 F. Supp. at p. 745.) Under this view, courts should interpret CGL policies by affording them narrow legal meanings under which the terms "legally obligated" and "damages" exclude the costs of equitable relief from coverage. Classifying reimbursement of government cleanup costs as equitable "restitution" and costs of compliance with injunctions as a consequence of equitable relief, several courts have concluded for this reason that neither type of relief is covered. (See, e.g., Cincinnati Ins. Co. v. Milliken and Co. (4th Cir.1988) 857 F.2d 979, 981; Verlan, Ltd. v. John L. Armitage & Co., supra, 695 F. Supp. at pp. 953-955.)
As these decisions suggest, two general arguments underlie the insurers' position that expenses incurred under CERCLA and similar statutes are not covered by the CGL policies at issue. First, it is argued that established rules of insurance policy interpretation are inapplicable in this context, and that we should apply more restrictive principles that will preclude coverage of environmental response costs under these policies. Second, even under traditional principles of interpretation, the policies should be interpreted to unambiguously exclude coverage of the types of relief sought in the underlying suits. We examine these propositions in turn.
A. PRINCIPLES OF INSURANCE POLICY INTERPRETATION
Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. (Civ.
If there is ambiguity, however, it is resolved by interpreting the ambiguous provisions in the sense the promisor (i.e., the insurer) believed the promisee understood them at the time of formation. (Civ. Code, § 1649.) If application of this rule does not eliminate the ambiguity, ambiguous language is construed against the party who caused the uncertainty to exist. (Id., § 1654.)
We deem this party to be the insurers. They have presented no evidence suggesting that the provisions in question were actually negotiated or jointly drafted.
B. INTERPRETATION OF CGL POLICY LANGUAGE
The CGL policies at issue in this case cover sums which FMC becomes "legally obligated" to pay as "damages" (or "ultimate net loss") incurred because of "property damage." We next consider whether, as a matter of law, the types of relief at issue in the third party suits satisfy these requirements.
1. "Legally Obligated"
Both injunctions and awards of response costs under CERCLA reasonably can be viewed as equitable relief. (See, e.g., United States v. Northeastern Pharmaceutical (8th Cir.1986) 810 F.2d 726, 749, cert. den. (1987) 484 U.S. 848 [98 L.Ed.2d 102, 108 S.Ct. 146] [no right to jury trial in suit seeking reimbursement of response costs]; In re Acushnet River & New Bedford Harbor Proceed. (D.Mass. 1989) 712 F.Supp. 994, 1001 [no right to jury trial in suit for injunction and reimbursement of response costs under
Moreover, even if this phrase raises doubts in the minds of legally trained observers about whether a law-equity distinction was intended, it would be unreasonable to conclude that it unambiguously incorporates this sophisticated distinction into the policies. In this respect, whatever ambiguity it possesses in light of a party's legal knowledge is resolved in favor of coverage. (See ante, p. 822.) Whether the term "legally obligated" is ambiguous or not, therefore, we conclude that it encompasses the types of relief sought in the third party suits.
We next consider whether FMC's prospective legal obligation in the third party suits is to pay "damages." Because the CGL policies do not define the word "damages," for interpretation purposes we look to its "ordinary and popular" definition. (Civ. Code, § 1644; Allstate Ins. Co. v. Thompson (1988) 206 Cal.App.3d 933, 938 [254 Cal.Rptr. 84].) Section 3281 of the Civil Code provides: "Every person who suffers detriment from the unlawful act or omission of another, may recover from the person in fault a compensation therefor in money, which is called damages."
The courts have generally applied similar definitions for insurance purposes. (See, e.g., Jaffe v. Cranford Ins. Co. (1985) 168 Cal.App.3d 930, 935 [214 Cal.Rptr. 567] ["`damages' describes a payment made to compensate a party for injuries suffered"]; Specialty Coatings, supra, 535 N.E.2d at p. 1080 [applying dictionary definition]; National Indem. Co. v. U.S. Pollution Control Inc., supra, 717 F. Supp. at p. 767 [applying dictionary definition]; Intel, supra, 692 F. Supp. at p. 1189 [applying Cal. statutory definition]; New Castle County v. Hartford Acc. & Indem. Co., supra, 673 F. Supp. at p. 1365 [applying dictionary definition].)
Several courts, however, have declined to apply dictionary or statutory definitions. At one end of the spectrum, some decisions have used narrower technical meanings, focusing on the distinction between law and equity. (See, e.g., Armco, supra, 822 F.2d at p. 1352 ["`Damages,' as distinguished from claims for injunctive or restitutionary relief, includes `only payments to third persons when those persons have a legal claim for damages.'"].) For purposes of California law, which interprets policy language in its "ordinary and popular" sense unless the parties expressed an intent otherwise
At the other end of the spectrum, some courts have applied definitions broader than the statutory or dictionary definitions described above. In Aerojet, supra, 211 Cal. App.3d at page 226, the Court of Appeal rejected the statutory and dictionary definitions, reasoning that "from the standpoint of the lay insured, `damages' could well include any sum expended under sanction of law.... [T]he insured may reasonably expect coverage for any sums expended, either at law or equity, as a result of the insured's causing property damage to another." (Ibid.; see also U.S. Fidelity and Guar. Co. v. Thomas Solvent Co. (W.D.Mich. 1988) 683 F.Supp. 1139, 1168 ["it seems to me that the insured ought to be able to rely on the common sense expectation that property damage within the meaning of the policy includes a claim which results in causing him to pay sums of money because his acts or omissions affected adversely the rights of third parties."]; New Castle County v. Hartford Acc. & Indem. Co., supra, 673 F. Supp. at p. 1366 ["Since the required remedial actions were ultimately enforceable in a legal proceeding, they constituted sums that the County was legally obligated to pay as damages."]; Fireman's Fund Ins. Companies v. Ex-Cell-O Corp., supra, 662 F. Supp. at p. 75 ["coverage does not hinge on the form of action taken or the nature of relief sought, but on an actual or threatened use of legal process to coerce payment or conduct by a policyholder."].) This definition includes the basic concepts of "loss" or "detriment" recognized in the statutory and dictionary definitions, but omits any requirement that the expenditure incurred as a result of such loss be "compensation" provided to an aggrieved party.
Although we agree that a layperson might reasonably define "damages" in such broad terms, it is unlikely that he would do so in the context of the coverage provision at issue here, taken as a whole. In this respect, the Aerojet (supra, 211 Cal.App.3d 216) definition suffers from the same defect as the narrow one discussed above. It essentially construes damages as "all sums the insured becomes legally obligated to pay because of property damage." CGL policies, however, cover "all sums which the insured becomes legally obligated to pay as damages because of property damage."
We note, however, that CERCLA and the Hazardous Substance Account Act authorize alternative remedies — injunction and reimbursement — that are relatively interchangeable in a way perhaps not foreseen by the parties at the time they entered the CGL policies. As we discuss at greater length below, the policies necessarily present some ambiguity in light of statutory schemes that by their very operation tend to eliminate the formal distinction between compensation paid to an aggrieved party and sums expended by the insured under compulsion of injunction. (See post, p. 840.) For this reason, although we take the statutory and dictionary definitions described above to be the "ordinary and popular" definition of "damages" for interpretation purposes, we will not apply this definition inflexibly. To the extent that policy language is ambiguous in light of the way environmental statutes authorize relief, our goal remains to protect the objectively reasonable expectations of the insured. (See, e.g., Reserve Insurance Co. v. Pisciotta, supra, 30 Cal.3d at p. 808.)
With this background, we now examine whether the basic forms of relief at issue in the underlying suits are "damages."
(a) Reimbursement of government response costs
The first element of the statutory and dictionary definitions of "damages" is fulfilled in this case. The agencies suffer "loss" or "detriment" in two
Viewed in this second context, such expenditure constitutes "loss" or "detriment" even as to agency efforts specifically directed at cleaning up property in which neither the state nor the federal government has an ownership interest. Under statute, the agencies are charged with the duty of removing hazardous waste, whether or not their proprietary interests are harmed or they ultimately are compensated for their efforts. They are not mere contractors who act out of an expectation of recompense for their cleanup work; their expenses are incurred as a matter of public duty rather than hope of private gain. Thus, when they seek reimbursement of their response costs, the basis of the claim is harm done to the public fisc. In ordinary terms, such harm constitutes "loss" or "detriment."
The language of the CGL policies themselves supports this view. The clauses at issue here cover sums expended as damages "because of property damage." If "damages" is construed to include a requirement that the aggrieved party suffered harm to a proprietary interest in the damaged property, the latter phrase becomes redundant. The plain language of the policies therefore supports the conclusion that the agencies' out-of-pocket expenditures, irrespective of the government interest in the property sought to be cleaned up, constitute "loss" or "detriment."
The second element of the statutory and dictionary definitions of "damages" is also fulfilled in this case. FMC's reimbursement of government response costs is monetary "compensation" for the loss suffered by the agencies when they proceed with environmental cleanups. Moreover, because the compensable loss is all remedial out-of-pocket expenditures incurred by the agencies, the "compensation" sought from FMC includes reimbursement for costs of cleaning up existing contamination on and off the disposal site itself, investigating the extent of contamination or the viability of cleanup options, and monitoring the spread of waste from the site. (See, e.g., Intel, supra, 692 F. Supp. at p. 1192.) As long as some "property damage," as defined below, has already taken place, the agencies' expenses for responding constitute loss or detriment, whether or not the
For three specific reasons not relating to the ordinary meaning of the word "damages," however, the insurers contend that a reasonable interpretation excludes reimbursement of response costs from coverage under the CGL "damages" provision. First, they argue that because CERCLA distinguishes response costs from damages, it mandates the same distinction in the insurance context because the agencies do not seek "damages" as prescribed by statute. Second, the insurers contend that because environmental statutes authorize the agencies to recover response costs even if they suffer no property damage or personal injury, such recovery is "a government-imposed cost of doing business" rather than compensation for loss or detriment. Finally, the insurers contend that reimbursement is best characterized as restitutive relief, the measure and purpose of which is sufficiently different from "damages" to render the two concepts mutually exclusive. None of these arguments is persuasive in the insurance context.
(i) Statutory distinctions between "response costs" and "damages."
However damages and response costs are measured, we do not believe, as the insurers contend and several courts have concluded (see, e.g., NEPACCO, supra, 842 F.2d at p. 986; Mraz v. Canadian Universal Ins. Co., Ltd.,
More significantly, our ultimate conclusion as to whether reimbursement of response costs is "damages" for insurance purposes is, as noted above, predominantly a question of how, under state law, insurance policies should be interpreted. (Cf. Aerojet, supra, 211 Cal. App.3d at p. 235; Chesapeake Utilities Corp. v. American Home Assur., supra, 704 F. Supp. at p. 560; Intel, supra, 692 F. Supp. at pp. 1186-1187; Specialty Coatings, supra, 535 N.E.2d 1071, 1080.) We are not bound by distinctions or definitions contained in CERCLA itself, if such distinctions do not reflect the intent of the parties to the CGL policies at the time of their formation. For this reason, even to the extent that CERCLA distinguishes between response costs and damages, this fact seems immaterial to the interpretation question at issue in this case. The parties' intent in entering the CGL policies could not possibly have been influenced by the niceties of statutory language adopted many years after the policies were drafted.
(ii) Reimbursement of response costs as a cost of doing business.
As reflected by Aetna Cas. & Sur. v. Gulf Resources & Chem. Corp. and Armco, the argument that reimbursement of response costs is uninsurable has two strands, both emanating from the fact that government agencies rather than private landowners are the parties seeking reimbursement. First, government agencies have only a regulatory interest in the property sought to be cleaned up. Second, the response they seek is prophylactic in nature, and therefore cannot be the subject of insurance.
Neither of these arguments possesses merit in the context of the environmental cleanups at issue here. The first contention fails to take into account the principles that guide interpretation of insurance policies. An ordinary definition of "damages" does not necessarily focus on the aggrieved party's proprietary interest; it is sufficient that the party have suffered some detriment, purely regulatory though it may be, that is compensable by an award from a responsible party. (See ante, pp. 828-829.)
Although the second argument has some merit in the abstract, it misperceives the nature of the response costs sought by the agencies in most hazardous waste cases, including this one. As is discussed below, it is true that government regulations or court orders requiring businesses such as FMC to undertake purely prophylactic measures designed to prevent future discharges of hazardous waste result in costs that are not covered by CGL policies. Such government actions are distinguishable, however, from the reimbursement sought by the agencies here, as well as that in cases such as Armco, supra, 822 F.2d 1348. In our view, the Armco approach to what constitutes "damages" for insurance policy purposes is unduly narrow. In many contexts, a party may recover "damages" without any "harm to human or animal life" having occurred. The absence of such harm does not vitiate the loss incurred by the agencies in undertaking remedial measures.
Because the third party suits here (like that at issue in Armco) rest on allegations of past and present damage to land and water on and surrounding
Thus, even if government response costs are incurred largely to prevent damage previously confined to the insured's property from spreading to government or third party property (i.e., the costs are "mitigative" in character), reimbursement of such costs constitutes "damages" in ordinary terms. A contrary result would fail to fulfill the reasonable expectations of the parties. (See Aerojet, supra, 211 Cal. App.3d at p. 227, citing Globe Indem. Co. v. State of California, supra, 43 Cal. App.3d at p. 751 [it would "seem strangely incongruous" to the insured "that his policy would cover him for damages to tangible property destroyed through his negligence in allowing a fire to escape but not for the sums incurred in mitigating such damages by suppressing the fire"]; Goodyear Rubber & Supply v. Great Am. Ins. Co. (9th Cir.1976) 545 F.2d 95, 96 ["It would be a strange kind of justice, and a stranger kind of logic, that would hold the defendant to be liable for as much as $450,000 if the barge and its contents had been consumed by fire, but free of liability for a much lesser amount because of the fortuity of rescue."]; Intel, supra, 692 F. Supp. at p. 1192; Bankers Trust Co. v. Hartford Acc. & Indem. (S.D.N.Y. 1981) 518 F.Supp. 371, 373-374; Leebov v. United States Fidelity and Guaranty Co. (1960) 401 Pa. 477 [165 A.2d 82, 84].) For this reason, we consider it immaterial to the issue before us whether or not the agencies, in seeking reimbursement of response costs, have suffered harm to a proprietary interest. Unlike the situation when agencies seek prophylactic measures, reimbursement of environmental response costs — whether incurred for remedial or mitigative purposes — is not an uninsurable cost of doing business.
The insurers' argument as to the measure of relief is as follows: recovery of common law "damages" is limited to the lesser of the diminution in value of property harmed or the costs of repair. Reimbursement of response costs, however, resembles the costs of repair, which may be higher than diminution in the value of property. If costs of repair exceed the value of damaged property (as they often may under CERCLA), either the entire recovery or, at a minimum, the excess cannot be considered "damages" because it exceeds the actual harm to the plaintiffs' property. (See, e.g., NEPACCO, supra, 842 F.2d at pp. 986-987; Travelers Ins. Co. v. Ross Elec. of Washington, Inc., supra, 685 F. Supp. at p. 744; Hanna, supra, 224 F.2d at p. 503.)
The insurers' argument contains several flaws. First, recovery of tort damages is not invariably limited by the value of damaged property. The courts have recognized that recovery in excess of such value may be necessary to restore the plaintiff to the position it occupied prior to a defendant's wrongdoing. (See, e.g., Heninger v. Dunn (1980) 101 Cal.App.3d 858, 863 [162 Cal.Rptr. 104] [permitting recovery of reasonable repair costs in excess of value of damaged property, when plaintiff has personal reason for making repairs]; Dandoy v. Oswald Bros. Paving Co. (1931) 113 Cal.App. 570, 572-573 [298 P. 1030] ["To hold that appellant is without a remedy merely because the value of land has not been diminished, would be to decide that by wrongful act of another, an owner of land may be compelled to accept a change in the physical condition of his property, or else perform the work of restoration at his own expense. This would be a denial of the principle that there is no wrong without a remedy."]; see generally Rest.2d Torts, § 929.)
Second, even if the courts generally award tort "damages" in an amount limited to the lesser of the value of damaged property or the costs of repair, that does not mandate that a greater recovery authorized by state or federal
This brings us to the alternative thrust of the insurers' argument: reimbursement of government response costs is not "damages" because it is a restitutive remedy that is "specific" rather than "substitutive" in character. The United States Supreme Court recently adopted this distinction in discussing whether a state's claim for "reimbursement" of federal Medicaid subsidies is a claim for "money damages" under the terms of the Administrative Procedure Act (APA) (5 U.S.C. § 702). Characterizing such a claim as one for "restitution," the high court held that it was therefore not a claim for money damages: "Our cases have long recognized the distinction between an action at law for damages — which are intended to provide a victim with monetary compensation for an injury to his person, property, or reputation — and an equitable action for specific relief — which may include an order providing ... for `the recovery of specific property or monies. ...'" (Bowen v. Massachusetts (1988) 487 U.S. 879, 893 [101 L.Ed.2d 749, 763, 108 S.Ct. 2722] [citation omitted, italics in original]; see also Maryland Dept. of Human Resour. v. Dept. of H.H.S. (D.C. Cir.1985) 763 F.2d 1441, 1446 ["the term `money damages' [under the APA] ... normally refers to a sum of money used as compensatory relief. Damages are given to the plaintiff to substitute for a suffered loss, whereas specific remedies `are not substitute remedies at all, but attempt to give the plaintiff the very thing to which he was entitled.' [Citation omitted.]"].)
We, too, have recognized a distinction between restitution and compensatory damages. (See McHugh v. Santa Monica Rent Control Bd., supra, 49 Cal.3d at p. 363 [maj. opn.]; id. at p. 387 [Panelli, J., conc.].) Reimbursement can reasonably be labelled a restitutive remedy, either because it awards a plaintiff "the very thing to which he was entitled" (see Maryland Dept. of Human Resour. v. Dept. of H.H.S., supra, 763 F.2d at p. 1446), or because it attempts to compensate a plaintiff for the cost of performing the duty of another (see Rest., Restitution, § 115 [providing that a person who performs the duty of another is entitled to "restitution"]).
This label does not, however, preclude characterization of the amounts in question here as "damages" awarded to compensate a plaintiff for out-of-pocket expenditures. Indeed, restitution, to which the insurers analogize the
These cases are inapposite. Unlike State Farm Fire & Cas. Co. v. Superior Court, supra, 191 Cal.App.3d 74 the relief sought in the underlying suits at issue here is not punitive. CERCLA, for example, is a strict liability statute that serves essentially remedial goals, irrespective of fault. (See, e.g., United States v. Northeastern Pharmaceutical, supra, 810 F.2d at pp. 732-737, 740-741; J.V. Peters & Co., Inc. v. Administrator, EPA (6th Cir.1985) 767 F.2d 263, 265-266; State of N.Y. v. Shore Realty Corp. (2d Cir.1985) 759 F.2d 1032, 1043-1044.) Reimbursement of response costs, moreover, is not restitutive in the narrow sense identified by Jaffe as inappropriate for insurance coverage. (See Jaffe v. Cranford Ins. Co., supra, 168 Cal. App.3d at p. 935 ["Although the concept of `restitution' may have a broader meaning in other contexts, we limit our reference to it here to situations in which the defendant is required to restore to the plaintiff that which was wrongfully acquired."]; Aerojet, supra, 211 Cal. App.3d at p. 231 [distinguishing Jaffe on this basis].)
(b) Costs of compliance with injunctions
The costs of injunctive relief, whether incurred for prophylactic, mitigative, or remedial purposes, do not readily satisfy the statutory or dictionary definitions of "damages." Because such costs are paid to employees or independent contractors rather than aggrieved parties, they do not directly "compensate" aggrieved persons for "loss" or "detriment." (See ante, pp. 828-830.) To be sure, in economic terms it may make little difference whether cleanup is performed and paid for directly by the insured pursuant to injunction or undertaken by the agencies (who then seek reimbursement). Nonetheless, it is difficult to construe the two methods of payment as equally covered by the ordinary definition of the word "damages," as we have described it above. If the costs of injunctive relief may be deemed "damages," the "as damages" limitation contained in the policies seems to be rendered meaningless. The costs of injunctions are essentially "sums to which the insured becomes legally obligated to pay ... because of property damage." Construing them also to be "sums to which the insured becomes legally obligated to pay as damages because of property damage" makes the italicized phrase redundant. Because we are obligated to give effect to every part of an insurance policy (Civ. Code, § 1641), we hesitate to reach this result.
It is unlikely, however, that the parties to CGL policies intended to cover reimbursement of response costs but not the costs of injunctive relief, at least where the latter costs are incurred — generally at a lower total cost — for exactly the same purposes addressed through governmental expenditure of response costs. In this respect, we note that the relationship between the remedies authorized by CERCLA and similar statutes is not the same as that between damages and injunctive remedies traditionally available at common law and in equity. In ordinary tort actions, injunctive relief is generally available only if legal remedies (e.g., monetary compensation) are inadequate. (Code Civ. Proc., § 526; Civ. Code, § 3422; see generally 6
In Hanna, supra, 224 F.2d 499, the leading case holding that the cost of complying with mandatory injunctions in tort actions is not "damages" under CGL policies, adjoining property owners brought suit against the insured, alleging trespass by boulders and debris from the insured's property. The owners sought no damages (and there was no evidence that the value of their property had decreased as a result of the encroachment). Instead, they sought, and obtained, an injunction ordering the insured to remove the debris. The Fifth Circuit Court of Appeals held the costs of complying with the injunction not covered under the insured's liability policy, which contained substantially the same coverage clause as those at issue here. Its reasoning, however, focused on the fact that, under Florida law, the owners' potential damages remedy was limited to the diminution in value of their property; injunctive relief, by contrast, required monetary payment whether or not the value of the owners' property had decreased. Because there was no evidence of any decrease in property value, the court reasoned, the costs of complying with the injunction were not "damages." (Hanna, supra, 224 F.2d at p. 503.)
We need not here decide whether the reasoning of Hanna is persuasive as a matter of California law.
The mere fact that the agencies seek an injunction in an environmental protection action does not indicate an absence of cognizable property damage or personal injury. The prima facie case for injunctive relief is identical to that for reimbursement of response costs, with the single added element of "imminent and substantial endangerment" of public health or welfare or the environment. (See, e.g., United States v. Bliss (E.D.Mo. 1987) 667 F.Supp. 1298, 1313.) Moreover, in its remedial aspects, the injunction results in exactly the type of expenditures involved in reimbursement of response costs, whether or not the agencies have an adequate remedy in the form of reimbursement. (See, e.g., United States v. Price (D.N.J. 1983) 577 F.Supp. 1103, 1112 [Congress intended injunctive relief under 42 U.S.C. § 9606 to be "a viable alternative or concurrent means of achieving the same goal" as reimbursement under 42 U.S.C. § 9607].)
For these reasons, it would exalt form over substance to interpret CGL policies to cover one remedy but not the other. Given the practical similarity of remedies available under the environmental statutes at issue here, we believe a reasonable insured would expect both remedies to fall within coverage as "damages." Insofar as injunctive relief is an equivalent substitute for the goal of government remedial action, the distinction relied on by Hanna, supra, 224 F.2d 499, is inapposite in the CERCLA context.
A majority of courts have also reached this conclusion. Some have reasoned that such costs are "damages" according to the reasonable expectations of the parties, even if they would not be "damages" under technical definitions. (See, e.g., C.D. Spangler Construction Co. v. Industrial Crankshaft & Engineering Co., Inc., supra, 388 S.E.2d 557, 565; Aerojet, supra, 211 Cal. App.3d at p. 228; Chesapeake Utilities Corp. v. American Home Assur., supra, 704 F. Supp. at pp. 559-560.) Others have stated this conclusion in terms of public policy: costs of compliance must be interpreted as "damages" in the environmental context, because to hold otherwise would make insurance coverage hinge on the "mere fortuity" of the way in which government agencies seek to enforce cleanup requirements, would unreasonably constrain the agencies' choice of cleanup mechanisms, and would
We agree with the underlying rationale of these decisions. Under CERCLA and similar statutes, injunctive relief and reimbursement of response costs serve substantially the same purpose. For this reason, we find CGL policy language is ambiguous as applied to remedial and mitigative costs incurred pursuant to injunction under CERCLA and similar statutes, and therefore must be construed in favor of coverage to satisfy the reasonable expectations of the insured. (See ante, p. 822.)
In contrast to our determination, two federal Courts of Appeals have concluded that the costs of injunctive relief under CERCLA and similar statutes are not covered by CGL policies. (See NEPACCO, supra, 842 F.2d at p. 986; Armco, supra, 822 F.2d at p. 1353.) One of these decisions essentially relies on an uncritical adoption of the Hanna result (supra, 224 F.2d 499). (NEPACCO, supra, 842 F.2d at p. 986 [stating that "black letter insurance law holds that claims for equitable relief are not claims for `damages' under liability insurance contracts," while citing four cases supporting the proposition and three challenging it in the environmental context].) The other decision supports its conclusion by referring to the "prophylactic," and therefore uninsurable, nature of injunctive relief. (See, e.g., Armco, supra, 822 F.2d at p. 1353.) Because the reasoning of the Hanna court is not compelling in the CERCLA context, and because it is incorrect to portray injunctive relief under CERCLA and related statutes as wholly prophylactic in nature, we decline to follow these decisions.
It is true that some costs required under environmental injunctions are prophylactic in nature (e.g., altering dumping practices to prevent recurrences of leakage). As we discuss below, these costs are not incurred "because of property damage," and therefore are not covered by CGL policies. Nevertheless, environmental injunctions requiring remedial and mitigative action result in costs that constitute "damages" under CGL policies. Because an insured would reasonably expect equal coverage of the costs of
3. "Because of Property Damage"
We also hold that reimbursement of response costs and the costs of injunctive relief under CERCLA and related statutes are incurred "because of" property damage. As discussed above (see ante, pp. 828-829), the mere fact that the governments may seek reimbursement of response costs or injunctive relief without themselves having suffered any tangible harm to a proprietary interest does not exclude the recovery of cleanup costs from coverage under the "damages" provision of CGL policies. For similar reasons, in plain and ordinary terms such recovery is "because of" property damage. It is immaterial whether motivations other than protection of
This is true, moreover, whether the cleanup at issue in the underlying suits takes place on property owned by FMC, the state or federal government, or third parties. The provisions at issue here do not specify that coverage hinges on the nature or location of property damage. We therefore construe them to encompass damages because of property damage in general, regardless of by whom it is suffered.
We do agree that prophylactic costs — incurred to pay for measures taken in advance of any release of hazardous waste — are not incurred "because of property damage." (Cf. Aerojet, supra, 211 Cal. App.3d at p. 236; Boeing, supra, 784 P.2d at p. 516; CPS Chem. Co., Inc. v. Continental Ins. Co., supra, 536 A.2d at p. 317.) Until such damage has occurred, whether on the waste site itself or elsewhere, there can be no coverage under CGL policies. Beyond this limited circumstance, however, and because the agencies in this suit allege that the waste sites themselves and the water on and surrounding the sites have already been contaminated by hazardous waste, we conclude that the reimbursement and the costs of injunctive relief sought here at least in part constitute "damages because of property damage."
For the foregoing reasons, we conclude that the Court of Appeal erred in directing the superior court to enter summary adjudication in favor of the insurers. It is not clear, as a matter of law, that all of the relief for which FMC is potentially liable in the underlying suits cannot be deemed sums which it will be "legally obligated to pay as damages because of property damage." Although the costs of compliance with injunctions ordering FMC to undertake prophylactic measures are not covered by CGL policies covering payment of damages "because of property damage," the remaining remedies sought by the agencies in the underlying suits are not precluded from coverage as a matter of law; such relief satisfies the plain and ordinary meanings of the phrases "legally obligated," "damages," "ultimate net loss," and "because of property damage." Accordingly, we reverse the decision of the Court of Appeal and vacate its order issuing a writ of
Mosk, J., Broussard, J., Panelli, J., Eagleson, J., Kennard, J., and Arabian, J., concurred.
In addition, both the insurers and FMC have requested that we take judicial notice of documents allegedly indicating the view the other has taken of the CGL policies in connection with litigation and activities unrelated to this case. Because our focus here is on the intent of the parties at the time the policies were formed, the evidence contained in these documents is immaterial to our decision. For this reason, the requests for judicial notice are denied. (Evid. Code, § 459.)
We accept neither of these arguments. The first ultimately fails when examined in light of our focus on the reasonable expectations of the insured. (See ante, p. 822 & fn. 8.) As long as an injunction requiring cleanup ostensibly requires the insured to expend any sum of money, we believe a reasonable interpretation provides that the insured is "obligated" to pay the actual costs attributable to cleanup. The second argument rests on considerations of public policy, which we reserve for Congress and the Legislature.
Insurance Code section 533.5 provides no definition of "fine, penalty, or restitution." Because it expressly purports to declare preexisting law (see Stats. 1988, ch. 489, § 3), we look to the law prior to 1988 to determine the breadth of its prohibitions. Our examination leads us to conclude that the section does not preclude coverage of the relief sought by the state government in the third party suits at issue here.
The Hazardous Substance Account Act, enacted in 1981 (Stats. 1981, ch. 756, § 2, p. 2935 et seq.), expressly permits responsible parties to enter into agreements to "insure, hold harmless, or indemnify a party to the agreement for any costs or expenditures under this chapter." (Health & Saf. Code, § 25364.) Such expenditures include reimbursement of state response costs under the act. (Id., § 25360.) Even if reimbursement is "restitution," therefore, the more specific and preexisting terms of the act render Insurance Code section 533.5 inapplicable in this case. (See Code Civ. Proc., § 1859; County of San Diego v. Bouchard (1987) 195 Cal.App.3d 34, 39 [240 Cal.Rptr. 391].).
This conclusion is supported by the recent enactment of Assembly Bill No. 3334, 1989-1990 Regular Session, effective January 1, 1991, which amends Insurance Code section 533.5 to eliminate the source of this confusion, and states that the Legislature's original intent in enacting section 533.5 was "[n]ot to affect the existence, or nonexistence, of insurance coverage, or the duty to defend in actions such as, but not limited to, actions brought by any entity pursuant to Section 25360 of the Health and Safety Code ... or any similar federal law." (Stats. 1990, ch. 1512, § 2, No. 7 Deering's Adv. Legis. Service, p. 6533.)