AYDIN CORPORATION, Plaintiff and Respondent, v. FIRST STATE INSURANCE COMPANY, Defendant and Appellant.
This is an appeal by an excess insurer from the declaratory judgment establishing that it must pay some of the costs for the environmental clean-up of the insured's manufacturing site. The excess policy excludes from coverage damage resulting from pollution “unless ․ sudden and accidental.” Joining the majority of courts which have considered the issue we hold that this provision constitutes an exception to the general pollution exclusion, and as a result is part of the policy's coverage provisions. Instructions which required the insurer to prove the nonexistence of the policy's “sudden and accidental” coverage were erroneous and this error was prejudicial.
From 1969 until May of 1984 plaintiff Aydin Corporation operated a research and manufacturing complex on property in Palo Alto owned by Stanford University at which it fabricated, assembled, and repaired electrical transformers. These operations required the use of a variety of noxious chemicals, oils, solvents, and waste materials. Some of these fluids were stored in metal tanks buried underground; other liquids were kept aboveground in 55-gallon metal drums. The drums and material pumped out of the tanks were turned over to a disposal company.
It was in July of 1981 when Aydin discovered that PCB (polyclorinated biphenyl) groundsoil contamination Aydin believed had been corrected in 1980, had recurred, and on a much larger scale. PCB contamination was found in the area of the underground tanks. Solvent contamination of the groundwater beneath the site was also discovered. Numerous holes in the tanks were observed when they were removed in 1986. Aydin notified the California Department of Health Services, which promulgated a Remedial Action Order requiring Aydin to undertake an extensive program of studies, monitoring, and cleanup efforts. PCB's were found in the sludge leaking from the tanks. Additional groundsoil pollution was discovered beneath the main manufacturing structure, and around a sump behind that building. Aydin left the site in 1983, but it was still working at clean-up efforts a decade later.
In 1986 Aydin commenced this litigation for declaratory relief, seeking a judgment as to the coverage provided by its primary and excess insurers. From the start of 1980 to the end of 1981 (i.e., the period when the second PCB contamination was discovered), Aydin had $5 million of excess coverage issued by appellant First State Insurance Company (First State).
The case was tried in three phases. Phase I concerned threshold issues: the meaning and interpretation of the numerous insurance policies issued to Aydin. The trial court found a potential for coverage which obligated the insurers to provide Aydin with a defense against a Hewlett-Packard lawsuit generated by the pollution at Aydin's factory.
Following the conclusion of Phase I, and over First State's objection, the trial court approved Aydin's reasonable good faith settlements of approximately $6.7 million with all other insurers. Only First State did not settle.
Phase II was the most complicated, and the most contentious, part of the trial proceedings. An advisory jury was impaneled to hear evidence and return answers to special interrogatories concerning factual issues needed to establish insurance coverage (e.g., whether the contamination was “expected or intended”, “sudden and accidental”). On the basis of these factual determinations by the jury, the trial court concluded that there was coverage under First State's policies and that there was no applicable exclusion.
The only real issue in Phase III was whether the settlements between Aydin and the primary carriers exhausted Aydin's primary coverage, and thus activated First State's obligations as an excess carrier. Repeating its earlier conclusion that the settlements were fair and made in good faith, the trial court then concluded that the settling carriers were therefore immune from any claims by First State for equitable contribution or indemnity. The court's final determination was that because the amounts of the settlements exceeded the underlying primary coverage limits, First State's excess coverage was available to Aydin.
An axiom of insurance law is that the insured has the burden of proving the occurrence which forms the basis of a claim is within “the basic scope of insurance coverage.” (E.g., Weil v. Federal Kemper Life Assurance Co. (1994) 7 Cal.4th 125, 148, 27 Cal.Rptr.2d 316, 866 P.2d 774.) The equally firm corollary is that the insurer has the burden of proving an exclusion to coverage. (E.g., Searle v. Allstate Life Ins. Co. (1985) 38 Cal.3d 425, 437-438, 212 Cal.Rptr. 466, 696 P.2d 1308.) First State contends in effect that the trial court erroneously required it to prove an issue which should have been part of Aydin's burden of proving coverage under the policies.
In each of its two annual policies First State covenanted to pay “all sums which the INSURED shall be obligated to pay by reason of the liability imposed upon the INSURED by law or liability assumed by the INSURED under contract or agreement for damages and expenses, because of: [¶] A. PERSONAL INJURY as hereinafter defined; [¶] B. PROPERTY DAMAGE, as hereinafter defined ․ [¶] to which this policy applies, caused by an OCCURRENCE ․ happening anywhere in the world.” “Occurrence” is defined as “an accident or event including continuous repeated exposure to conditions, which results, during the policy period, in PERSONAL INJURY or PROPERTY DAMAGE neither expected nor intended from the standpoint of the INSURED․”
Each policy stated that it “shall not apply ․ [¶] To any liability of any INSURED, arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, solids, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water unless such discharge, dispersal, release or escape is sudden and accidental.” The dispute here centers on the language we have italicized.
Over First State's objections the trial court instructed the jury that “The defendant, First State Insurance Company, has the burden of proving by a preponderance of the evidence all of the facts necessary to establish that coverage exclusions included in the First State insurance policies apply and defeat Aydin Corporation's claim for insurance coverage. The three coverage exclusions which First State has asserted in defense against Aydin Corporation's insurance claims are (1) a pollution exclusion․” 1
“The policies issued by First State contain pollution exclusions. To establish its defense based on the pollution exclusions, First State has the burden of proving by a preponderance of the evidence (1) that Aydin Corporation's liability arises out of the ‘discharge, dispersal, release or escape’ of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, solids, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water; and (2) that the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, solids, liquids or gases, waste materials or other irritants, contaminants or pollutants was not ‘sudden and accidental.’ ”
The jury found that First State failed to satisfy the burden of proof described in the trial court's instructions.2 These findings were adopted by the trial court. No California decision existed to guide the trial court during Phase II. Not until many months later did a clear voice emerge, and it came from a federal court. In Aeroquip Corp. v. Aetna Cas. and Sur. Co., Inc. (9th Cir.1994) 26 F.3d 893, the court considered a similar provision 3 and held that its concluding language constituted an exception to a general exclusion for pollution-related damage. We set forth the court's reasoning for treating the exception as a coverage provision and thus up to the insured to prove:
“Although courts are split on this issue, the majority of decisions place the burden on the insured [citations]. [¶] This allocation aligns the burden with the benefit and is consistent with the general principle under California law that ‘ “[w]hile the burden is on the insurer to prove a claim covered falls within an exclusion, the burden is on the insured initially to prove that an event is a claim within the scope of the basic coverage.” ’ [Citations.] The ‘sudden and accidental’ exception creates coverage where it would otherwise not exist and thus the insured's burden of proving coverage extends to proof of this exception.
“Moreover, if the burden were on the insurer, the property owner would have an incentive to avoid finding out whether pollutants are being gradually discharged, because preservation of ignorance would increase the likelihood of insurance coverage. We do not think the California Supreme Court would adopt a rule creating such reverse incentives.
“This assignment to the insured is also consistent with the usual rules for allocating burdens of proof. The rule places the burden on the party who will generally have access to facts that show the discharge of pollutants was sudden and unexpected. If the discharge actually was sudden, ․ the policy holder should be better able to prove the suddenness than the insurer would be able to prove its absence.” (Aeroquip Corp. v. Aetna Cas. and Sur. Co., Inc., supra, 26 F.3d at pp. 894-895.)
Aeroquip4 is persuasive on its crucial point: the “sudden and accidental” language is an exception to an exclusion, and is therefore a source of coverage. The effect of the exception is to “reinstate coverage” for sudden and accidental pollution.5 (Shell Oil Co. v. Winterthur Swiss Ins. Co. (1993) 12 Cal.App.4th 715, 753, 15 Cal.Rptr.2d 815.) We agree that an exception to an exclusion is a negation of the exclusion and must therefore be treated as a coverage provision. Under the general rule it follows that if the insured gets coverage for damage caused by an onslaught of pollutants only if the onslaught is “sudden and accidental,” the insured must demonstrate that the damage is not the result of gradual or incremental contamination.
Because coverage is essential to an insured's claim, it is the insured which must shoulder the burden of proof. (Evid.Code, § 500.) This result is in accord with common sense and public policy.
It is only common sense that the insured will have greater information and knowledge about the insured's property and/or operations conducted by the insured which may result in damage or liability. The circumstances in this case furnish a perfect illustration. The Aydin site was in California; First State, by contrast, is a Massachusetts corporation, with its principal office in that state. It is impractical to require transcoastal monitoring by an excess insurer. The situation is best handled as it long has been, by the insured agreeing to contractual duties of: (1) reporting losses suffered or claims made, and (2) cooperating with the insurer's subsequent investigation. The insured's superior knowledge is the predicate for these duties.
It is the strong public policy of this state to prevent, eliminate, and reduce pollution. (E.g., Pub.Res.Code, §§ 21000-21002.) That policy would be impaired if the insured has a positive disincentive to discover pollution. Shifting the burden of proof constitutes such a disincentive because it would, as Aeroquip perceptively noted, reward ignorance by increasing the likelihood of insurance coverage. Rewarding an insured's see no evil position would also undercut the insured's obligations to the insurer of notice, cooperation, and good faith.
We conclude that Evidence Code section 500 and sound policy require that an exception to an exclusion in an insurance policy be treated as part of the policy's coverage provisions, and that the burden of proving the applicability of the exception be borne by the insured. It was therefore error in this case to assign that burden to the insurer.
The logic of Aeroquip is not impaired by the authorities upon which Aydin relies.
Bebbington v. Cal. Western etc. Ins. Co. (1947) 30 Cal.2d 157, 180 P.2d 673 involved a beneficiary's suit to recover on a life insurance policy issued to a person who died in a plane crash. The policy included a provision (not quoted in the opinion) excluding liability in the event the death of the insured occurred as a result of plane travel other than as a fare-paying passenger in a licensed aircraft flying a regularly scheduled passenger flight. The Supreme Court discussed the pertinent point as follows: “The burden of proof was on defendant to establish this defense and show the circumstances which brought the death within the exclusion clause. [Citations.] Failure of proof on this issue requires affirmance of the judgment for plaintiff. Defendant was able to show that the deceased was killed in an airplane crash, but failed to show that he was not riding as a passenger in a licensed passenger aircraft at the time.” (Id. at p. 159, 180 P.2d 673.) Seven years later the Court labeled Bebbington “distinguishable” and refused to apply it to a different type of policy. (Zuckerman v. Underwriters at Lloyd's (1954) 42 Cal.2d 460, 474, 267 P.2d 777.) Whether Bebbington was overruled by Zuckerman need not be resolved here. At a minimum, Zuckerman establishes that Bebbington should not be reflexively extended beyond the particular type of policy actually considered. First State's policy is certainly not of the same type.
Aydin also relies on Strubble v. United Services Auto. Assn. (1973) 35 Cal.App.3d 498, 110 Cal.Rptr. 828. The policy there was a homeowner's policy which covered damage resulting from earthquake but excluded damage attributable to earth movement due to other causes. The insured's property suffered extensive damage that may have started with an earthquake. The Court of Appeal held that the trial court correctly put on the insurer the burden of proving that the loss was covered by the excluded peril of earthquake. (Id. at pp. 503-504, 110 Cal.Rptr. 828.)
Strubble, like Bebbington, is distinguishable on a number of grounds. First, we are dealing with a different type of policy, the point of Zuckerman and a recurring theme of recent opinions from our Supreme Court. (See Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 663-666, 42 Cal.Rptr.2d 324, 913 P.2d 878 and decisions cited.) More fundamentally, Strubble 's burden of proof rule is not founded upon actual policy language, and involved nothing like the “exception to an exclusion” situation presented here. Strubble is therefore completely in line with the general and established rule that an insurer bears the burden of proving that a loss is covered by a policy exclusion. Finally, neither Bebbington nor Strubble discusses how Evidence Code section 500 affects the determination in each case to assign the burden of proof to the insurer. As already mentioned, Aydin's superior knowledge and access to the relevant evidence are very potent reasons for concluding that it should bear the burden of proving a “sudden and accidental” contamination covered by the First State's policies. This is a sound basis for Aeroquip 's implicit conclusion that the normal application of Evidence Code section 500 places the burden of proving a sudden and accidental pollution on the insured.6
Ordinarily we would next consider whether the error qualified as prejudicial according to familiar criteria. (E.g., Soule v. General Motors Corp. (1994) 8 Cal.4th 548, 570-571, 34 Cal.Rptr.2d 607, 882 P.2d 298.) We are relieved of that duty by Aydin's concession at oral argument that if error was found, it would require reversal.
The judgment is reversed. The parties shall bear their respective costs of appeal.
1. The two other exclusions relied upon by First State at trial are not involved in this appeal.
2. By a vote of 10 to 2, the jury replied NO to the question “Has First State met its burden of proving that Aydin Corporation's legal liability arises out of discharge(s), dispersal(s), release(s) or escape(s) of contaminants, into or upon a water course or body of water, which were not ‘sudden and accidental’ ”?By a vote of 9 to 2 the jury returned the same answer to the query “Has First State met its burden of proving that Aydin Corporation's legal liability arises out of discharge(s), dispersal(s), release(s) or escape(s) of contaminants, into or upon land, which were not ‘sudden and accidental’ ”?Five of the other six interrogatories were decided by votes of 10 to 0. The vote on the last interrogatory was 11 to 0. The fact that the jury's votes did not invariably total 12 may be explained by the trial court allowing jurors to abstain from voting. The court instructed the jury: “As soon as any nine or more jurors have agreed upon each answer[,] have the answer signed and dated by your foreperson and return it to this room.”
3. “This policy does not apply to ․ property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids, or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.” (Aeroquip Corp. v. Aetna Cas. and Sur. Co., Inc., supra, 26 F.3d 893, 894.)
4. The Aeroquipholding was noted in Haskel, Inc. v. Superior Court (1995) 33 Cal.App.4th 963, 978, fn. 13, 39 Cal.Rptr.2d 520, and followed in another decision which the Supreme Court ordered not to be published in the official reports. The problem was recognized but not resolved in ACL Technologies, Inc. v. Northbrook Property & Casualty Ins. Co. (1993) 17 Cal.App.4th 1773, 1794, 22 Cal.Rptr.2d 206.Our research shows Colorado, Florida, Maine, Massachusetts, Michigan, Minnesota, New York, Pennsylvania, and Rhode Island concluding that the burden of proof is on the insured, while Connecticut, Delaware, Illinois, Indiana and Kansas put it on the insurer. (See Aeroquip Corp. v. Aetna Cas. and Sur. Co. Inc., supra, 26 F.3d 893, 895 and Interex Corp. v. Atlantic Mut. Ins. Co. (D.Mass.1995) 874 F.Supp. 1406, 1416 for collection of decisions; see also Gould, Inc. v. Continental Cas. Co. (E.D.Pa.1993) 822 F.Supp. 1172 [Illinois law]; Indiana Gas Co. Inc. v. Aetna Cas. & Sur. Co. (N.D.Ind.1996) 951 F.Supp. 797 [Indiana law]; Redding-Hunter Inc. v. Aetna Cas. and Sur. Co. (App.Div.1994) 206 A.D.2d 805, 615 N.Y.S.2d 133 [N.Y. state court concluding that N.Y. law put burden on insured; federal courts had concluded N.Y. law would place burden on insurer].)
5. Conveying the same flavor, the courts of Minnesota say that the exception “restores” coverage. (See SCSC Corp. v. Allied Mut. Ins. Co. (Minn.1995) 536 N.W.2d 305, 314.)
6. Several commentators appear to suggest that the knowledge and access factors are sufficiently strong to justify modifying an application of Evidence Code section 500 that would place the burden of proof on an insurer. (See Croskey, Kaufman et al., Cal. Practice Guide: Insurance Litigation (Rutter 1995) §§ 3:157, 15:550, pp. 3-31, 15-106.) This opinion is in obvious response to the following comments to Evidence Code section 500 by the Law Revision Commission: “The general rule allocating the burden of proof applies ‘except as otherwise provided by law.’ The exception is included in recognition of the fact that the burden of proof is sometimes allocated in a manner that is at variance with the general rule. In determining whether the normal allocation of the burden of proof should be altered, the courts consider a number of factors: the knowledge of the parties concerning the particular fact, the availability of the evidence to the parties, the most desirable result in terms of public policy in the absence of proof of the particular fact, and the probability of the existence or nonexistence of the fact.” (Cal.Law Revision Com. com., Deering's Ann.Evid.Code (1986 ed.) § 500, p. 215 [emphasis added].)
FOOTNOTE. See footnote *, ante.
POCHÉ, Associate Justice.
ANDERSON, P.J., and REARDON, J., concur.