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Court of Appeal, Sixth District, California.

AIU INSURANCE CO. et al., Petitioners, v. The SUPERIOR COURT of Santa Clara County, Respondent, FMC CORPORATION, Real Party in Interest.

No. H005467.

Decided: September 07, 1989

Buchalter, Nemer, Fields & Younger, Robert A. Zeavin, Los Angeles, Deborah A. Pitts, Laguna Hills, Victor Rabinowitz, John J. Moura, San Jose, Susan Hoffman, and Kirk C. Chamberlin, Los Angeles, Morrison & Foerster and Marc P. Fairman, Michael M. Carlson, Annette P. Carnegie, and Elizabeth Kuczynski, San Francisco, for petitioners. Ropers, Majeski, Kohn, Bentley, Wagner & Kane and Michael J. Brady, Red Wood City, Hufstedler, Miller, Kaus & Beardsley and Peter O. Israel, Los Angeles, Wiley, Rein & Fielding and Thomas W. Brunner, Robert R. Lawrence and Sharon Rau Dissinger, Washington, D.C., for amicus curiae in support of petitioners. No appearance for respondent. Paul, Hastings, Janofsky & Walker, David W. Steuber, Kirk A. Pasich and Glenn Warner, Los Angeles, Bowen H. Tucker, Anderson, Russell, Kill & Olick and Eugene R. Anderson, John H. Gross, Finley Harckham, and Barbara A. Curran, New York City, for real party in interest. Heller, Ehrman, White & McAuliffe and Robert T. Haslam, Palo Alto, Covington & Burling and Joanne B. Grossman, William F. Greaney, Washington, D.C., and Jennifer S. Divine, for amici curiae in support of real party in interest.

When governmental agencies acting by authority of provisions of environmental law compel a toxic polluter to clean up the pollution it has caused, does the polluter's liability insurance provide coverage for the costs of such remedial action?   This is the issue which the parties tender to us for resolution, after the trial court refused to grant the insurers a partial summary adjudication that there was no coverage for such liability.   We hold, for reasons we shall state in greater detail, that the liability policies of insurance before us here do not cover the insured's costs of having to remedy toxic pollution under governmental compulsion.   Our principal reason for this holding is that the policies' language unambiguously defines the insured's liability as that for “damages” because of injury to property;  and until the recent spate of environmental pollution cases, no authority held that such liability insurance policies provide coverage for the costs of compliance with governmental exercise of the police power, nor for the costs of responding to an injunction.   Accordingly the parties to these policies cannot reasonably have expected that there was such coverage.

This case does not involve liability of FMC for damages for injury to property owned by any governmental agency or private third party.   We deal here only with so-called response and remediation costs incurred as a result of governmental exercise of the police power.   For example, this lawsuit does not determine the liability of FMC's insurers for any liability FMC may incur under the “damages” section of the federal Comprehensive Environmental Response Compensation Liability Act (“CERCLA”).  (42 U.S.C. § 9601 et seq., specifically, 42 U.S.C. § 9607(a)(4)(C).)   Nor does this case present the issue whether the insurers are required to indemnify FMC to the extent that any payment by FMC of response costs may serve indirectly to compensate any person or entity for injury to or loss, destruction, or loss of use of property.   Insofar as the record before us shows, no owner of damaged or destroyed property is party to this declaratory relief action or to any underlying action to recover response costs only.   In short we express no opinion on coverage of traditional actions against FMC for damages for injury to property, even where those damages may coincidentally be measured by the costs of cleanup or remediation.   We address only the question of coverage of the costs of compliance with an exercise of the police power.

History of the Action

FMC Corporation (“FMC”) brought this declaratory relief action to establish that certain liability insurance policies provide coverage for FMC's potential liability in environmental actions brought against it by federal and state agencies.   In those environmental actions the governmental agencies seek to compel FMC to reimburse the agencies for their costs of investigation and remediation of toxic pollution allegedly caused by FMC on various sites nationwide, as well as to compel FMC to itself take preventive and remedial action.

FMC's liability insurers (“Insurers”) moved for summary adjudication that claims such as these (sometimes referred to as response costs) are not covered under policies obligating Insurers to indemnify FMC for sums which FMC may become liable to pay “as damages.”   The trial court denied Insurers' motion.   Insurers petition for statutory mandate review.  (Code Civ.Proc., § 437c, subd. (l ).)

The Actions Against FMC

The United States government here proceeds against FMC under CERCLA, specifically, sections 9607(a)(4)(A) and (B) of that statute, which sections provide for so-called remediation and response costs to remedy toxic pollution upon sites other than governmentally owned property.   CERCLA also gives the United States Attorney General authority to require abatement of a hazard or threat of pollution.  (42 U.S.C. § 9606) In contrast, a separate section of CERCLA, section 9607(a)(4)(C), imposes liability for “damages” for injury to, destruction of, or loss of natural resources, where the government has a proprietary interest in the property.   The United States Department of the Interior distinguishes between response actions under subsections (A) and (B), supra, “which have as their primary purpose the protection of human health,” and subsection (C) which attempts to determine “proper compensation to the public for injury to natural resources.”  (51 Fed.Reg. 27674.)   This case does not involve any question of insurance coverage of any liability of FMC under the “damages” provision of CERCLA, § 9607(a)(4)(C), supra.

In addition to the federal actions, local governmental agencies also proceed against FMC under analogous provisions of local environmental law.   FMC's complaint describes the environmental actions as to which it seeks coverage as lawsuits in which the “governmental claimants ․ typically seek to recover monies expended to investigate, monitor, survey, test, and gather information to identify and evaluate the existence of contamination and of danger to the public health and welfare and to recover costs incurred in corrective actions taken to date.   They also seek orders compelling FMC and others to take any actions necessary to remedy conditions at the site.   Claims asserted by governmental agencies include claims pursuant to federal laws and laws of various states, ․”  The complaint goes on to describe many federal and state statutes under which claims are brought.  (E.g., Health & Saf.Code, §§ 25300–25395, the Cal.Carpenter–Presley–Tanner Hazardous Substance Account Act;  see also the Clean Water Act, 33 U.S.C. § 1364;  The Resource Conservation & Recovery Act (RCRA) 42 U.S.C. § 6973;  and the Safe Drinking Water Act, 42 U.S.C. § 300i.)

Contentions of Insurers

The insurers' arguments that there is no coverage for such expenses may be summarized as follows:  (1) the weight of Federal decisions on the issue holds there is no coverage of a party's obligation to reimburse the government for the costs of cleaning contaminated sites, because that obligation is one to make equitable restitution, not to pay damages at law, and the liability insurance policies cover “damages”;  (2) the trial court erred in applying rules of construction to resolve ambiguity because the term “damages” in the policies is not ambiguous;  (3) a recent provision of California insurance law, Insurance Code section 533.5, forbids insuring against payment of any fine, penalty or restitution order, and here makes unlawful the coverage FMC argues for, since the agencies seek against FMC compensation in the nature of equitable restitution.

Contentions of FMC

FMC makes the following arguments in favor of coverage:  (1) The cases denying coverage for such costs are not cogently reasoned and rest on technical distinctions of damages at law versus equitable restitution.   California makes no such distinctions.  (2) Principles of insurance contract construction in California require effectuating the parties' reasonable expectations and construing in favor of coverage.   These principles are violated by the out of state authority denying coverage based on a technical definition of “damages.”  (3) At least some of the policies contain very broad language of coverage going beyond damages at law.  (4) Environmental cleanup actions are not analogous to criminal or quasi-criminal actions for fines and penalties (against which it is illegal to insure oneself).   The pollution was not deliberate.   Finding coverage will not tend to encourage wrongdoing.

The Language of the Insurance Policies

The provisions of the various insurance policies which were tendered for judicial construction on the motion for summary adjudication all contain language substantially similar to the following:  the insurer will pay “on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of injury to or loss, destruction or loss of use of property.”   Some policies further define “damages” as damages because of personal injury or property damage to which the policy applies;  or, as personal injuries, property damage, or advertising liability;  or, as damages, direct or consequential, and expenses, defined as “ultimate net loss,” which term is in turn defined as “the total sum which the Assured ․ becomes obligated to pay by reason of ․ property damage ․ claims, either through adjudication or compromise, and shall also include ․ expenses for ․ litigation, settlement, adjustment and investigation of claims and suits which are paid as a consequence of any occurrence covered․”  For purposes of our holding it is not necessary to distinguish the primary and excess liability insurance policies.


Governmental Exercise of the Police Power Is Not Covered by Liability Insurance

The majority of decisions hold that liability insurance does not cover the costs of compliance with a mandatory injunction.  (E.g., Aetna Casualty and Surety Company v. Hanna (5th Cir.1955) 224 F.2d 499, 503–504 [“Hanna ”];  Garden Sanctuary, Inc. v. Insurance Co. of No. Amer. (Fla.Ct.App.1974) 292 So.2d 75;  Desrochers v. New York Cas. Co. (1954) 99 N.H. 129, 106 A.2d 196;  Ladd Const. Co. v. Ins. Co. of North America (1979) 73 Ill.App.3d 43, 29 Ill.Dec. 305, 391 N.E.2d 568;  see also Hackethal v. National Casualty Co. (1987) 189 Cal.App.3d 1102, 234 Cal.Rptr. 853;  United Pacific Ins. Co. v. Hall (1988) 199 Cal.App.3d 551, 245 Cal.Rptr. 99;  State Farm Fire & Cas. Co. v. Superior Court (1987) 191 Cal.App.3d 74, 236 Cal.Rptr. 216;  and Jaffe v. Cranford Ins. Co. (1985) 168 Cal.App.3d 930, 214 Cal.Rptr. 567.)   Some decisions in this group hold that a liability insurer is liable only for money damages at law, not for costs of compliance with an injunction or other forms of equitable relief.  (For example, Hanna holds under Florida law that an insurer cannot be required to defend an action in equity seeking an injunction to prevent the insured from allowing continuing deposits of boulders, trash and dirt on another's land.)   Other decisions deny coverage for governmental fines or penalties or other costs of compliance with governmental directives.  (For example, in Jaffe, a professional malpractice insurer was found not liable for coverage of penalties against the insured doctor for fraudulent claims against a state agency;  Hackethal held that an earned income reimbursement policy issued to a doctor to cover lost income for each day the insured is required to attend trial of a civil suit for damages against the insured did not cover time lost for a disciplinary hearing before the BMQA;  United Pacific ruled that an insurer was not liable on a homeowners policy to provide coverage for counsel's representation of insureds in a juvenile proceeding against their minor son for setting a fire at school.)

In harmony with these well established principles of insurance law, two Federal circuit courts of appeal have held that when the government seeks to exert its police powers under CERCLA to compel remediation of toxic pollution, the costs of compliance with such directives is similarly not covered by liability insurance.   These decisions are Maryland Cas. Co. v. Armco, Inc. (4th Cir.1987) 822 F.2d 1348, cert. den. 484 U.S. 1008, 108 S.Ct. 703, 98 L.Ed.2d 654 (1988) [“ARMCO ”];  Continental Ins. Co. v. Northeastern Pharmaceutical (8th Cir.1988) 842 F.2d 977, cert. den. 488 U.S. 821, 109 S.Ct. 66, 102 L.Ed.2d 43 (1988) [“NEPACCO ”].  (A recent Fourth Circuit decision following ARMCO is Cincinnati Ins. Companies v. Milliken and Co. (4th Cir.1988) 857 F.2d 979 [So.C. law].  The issue is also pending before the Ninth Circuit Court of Appeal from a ruling of the United States District Court, Northern District, California, granting summary judgment to the insured.  Intel Corp. v. Hartford v. Acc. & Indem. Co. (N.D.Cal.1988) 692 F.Supp. 1171.)

ARMCO, supra, applies Maryland law to conclude that the term damages applies only to awards in suits at law against the insured for money damages and not to restitutionary relief or cost of compliance with mandatory injunctions sought by governmental agencies under CERCLA.  (822 F.2d 1348, 1352.)   In addition to its interpretation of the Maryland law, the opinion states these reasons:  First, the term “damages” in the insuring agreement (all sums the insured may be obligated to pay as damages ) would be mere surplus if it did not qualify the insurer's obligation by restricting coverage to traditional damages at law and excluding equitable or nontraditional forms of relief such as injunctive relief under CERCLA.   Therefore as a matter of law the court construed the insurance policy there to cover damages, but not expenditures which result from compliance with directives of regulatory agencies.  (Id. at p. 1352.)

ARMCO rejects an argument made in some decisions finding coverage, that it is merely fortuitous whether the government chooses to clean up the pollution itself and sue for restitution, or instead mandates the polluter to undertake the cleanup.   The issue of coverage, in the opinion of those courts, should not depend on the form of such relief sought.   But the ARMCO court states that there may be significant differences between the kinds of relief sought;  the matter is not only one of the forms of relief chosen.   Restitution, or remediation, the court points out, may far exceed the amount of damages for the loss of the property.  (See id. at p. 1353;  disagreeing with such decisions as United States Aviex Co. v. Travelers Ins. Co. (1983) 125 Mich.App. 579, 336 N.W.2d 838 [“Aviex ”].)  Further, even if the costs to the defendant turned out to be the same in either case, nevertheless “it is a great step, and a dangerous one, for courts to begin to construe insurance policies to encompass costs of compliance with injunctive and reimbursement relief.”   (ARMCO, supra, at p. 1353.)

Central to the court's decision is this concept:  “Insurers are very reluctant to cover what are essentially prophylactic measures, such as safety precautions, for the obvious reason that such expenditures are subject to the discretion of the insured, and are not connected with any harm to specific third parties.   Insurers require certainty as to the extent of their liability and this certainty is set forth in the insurance policy․  The less obvious, but perhaps more telling reason that insurers are reluctant to cover avoidance costs is that insureds are far more likely to overutilize safety measures where another party is paying the bill.   Should policies be construed to cover some forms of harm-avoidance measures, courts would be faced with the very difficult problem of separating needed prophylactic measures from unnecessary or inefficient ones.”  (Id. at p. 1353.)

The ARMCO court did not discuss the issue of the subjective intentions of the parties, insurer and insured, regarding coverage.   It thus decided the issue of coverage as a matter of law, holding by necessary implication that the term “damages” in the policy before it was not ambiguous, or to put it more precisely, unambiguously did not cover the CERCLA relief sought.

Another Fourth Circuit decision in substantial agreement with ARMCO is Mraz v. Canadian Universal Ins. Co., Ltd. (4th Cir 1986) 804 F.2d 1325.   That decision also pointed out, in dictum, that response costs under CERCLA are not property damage within liability insurance policies.  (The case actually appears to have turned on a finding that there was no “occurrence” [manifestation of damage, leaking hazardous waste] when the defendant insurer was on the risk.   See 804 F.2d at p. 1329.)

We do not read ARMCO as turning on hypertechnical distinctions between law and equity.   A careful reading of the ARMCO decision reveals that the court there determined that as a matter of law a liability insurer did not intend to assume the massive and open ended risk of the costs of the insured's compliance with mandatory injunctions to remedy toxic pollution conditions.   The decision is, as quoted above, that insurers never intended to assume such uncertain and potentially enormous risks.   It is clear the decision is not based on common law formalism or arcane nuances of Maryland law (which law is barely touched upon in the ARMCO opinion).   It represents the considered opinion of the court that liability insurance policies were never intended to foot the bill for the kinds of remedies CERCLA and like statutes provide.   In our opinion, its holding is consistent with the authorities we have cited which deny coverage for the costs of compliance with governmental mandates.

In agreement with ARMCO is the more recent Eighth Circuit decision in NEPACCO, a five to three en banc decision applying Missouri law.   (Continental Ins. Companies v. Northeastern Pharmaceutical, supra, 842 F.2d 977.)   That law is substantially similar to California insurance law in requiring construction of ambiguities against the insurer and giving terms their lay rather than technical meanings.  (Id. at p. 985;  see also dissenting opinion, 842 F.2d at p. 990.)   Nonetheless, the majority held, following ARMCO, that cleanup costs under CERCLA are not legal damages within liability insurance policies.   The court noted the split of authority on the issue.  (Id. p. 985, citing, e.g., a contra authority, New Castle County v. Hartford Acc. & Indem. Co. (D.Del.1987) 673 F.Supp. 1359, 1365–1367.)   The NEPACCO court held that although outside the insurance context the term “damages” is ambiguous, it is not ambiguous within the insurance context, and its plain meaning refers to legal damages and not to equitable monetary relief.  (Ibid.)  The court finds its interpretation consistent with the policy language which does not hold the insurer liable for all sums which the insured may be obligated to pay but only for those sums it may have to pay “as damages.”  (Id. at p. 986.)   It also finds that construction consistent with traditional distinctions drawn in insurance law between money damages and injunctive relief.  (Id. at p. 986, citing inter alia ARMCO, supra.)

ARMCO, discussed above, points out the unpredictability and potential enormity of response costs under CERCLA as contrasted with traditional damages in lawsuits.  (ARMCO, supra, 822 F.2d at p. 1353.)   These costs are not limited to diminution in property value, unlike the “damages” section of the statute, section 9607(a)(4)(C).  (See, e.g., State of Idaho v. Bunker Hill Co. (D.Idaho 1986) 635 F.Supp. 665, 675–676.)

FMC seeks to rely on a California insurance case holding the insured may have indemnity for expenses incurred in suppressing fire spreading from its property to others' property.  (Globe Indem. Co. v. State of California (1974) 43 Cal.App.3d 745, 751, 118 Cal.Rptr. 75.)   The issue in Globe was whether liability insurance policies covered expenses charged against the insured by the State of California in suppressing a fire on the property of a third party, which fire had spread from the insured premises.   The court reasoned that since the policy would have covered damages assessed against the insured for his negligence, had he been sued for the resulting damage, it also covered his prevention expenses.   The decision emphasized that portion of the policy language extending coverage “ ‘to all sums which the insureds become legally obligated to pay as damages because of’ property damage.”  (Id. p. 751, 118 Cal.Rptr. 75.)   The court stated that liability for fire suppression costs could arise only if the fire caused some damage to property belonging to others, and the insureds became liable to pay such costs because of damage to tangible property;  therefore, there was coverage.  (Ibid.)  Also, the opinion characterized such costs as mitigation of damages, since in the court's view the insured would have been liable to others for damage caused by the fire if it went unreported, and the liability insurer would have been obligated to pay for such damages assessed against the insured.

We question the analytical underpinnings of the majority opinion in the Globe case.   As the dissent in that case pointed out, the very language which described the types of damages covered in the insurance policies also prescribed the measure of such damages, that measure being the amount necessary to compensate the injured property owner for his loss of value or loss of use of the property.  (See Globe, supra, dissenting opinion of J. Brown, at p. 754, 756–757, 118 Cal.Rptr. 75.)   Fire suppression costs in isolation and unrelated to damages cannot be measured within the policy terms.   It follows that coverage of such expenses was not the parties' intention.   Similarly here, the policy language speaks of injury to or loss of use of property, and again, these concepts are not relevant to the costs of complying with a governmental injunction to clean up pollution.   As the dissenting opinion in Globe pointed out, earlier decisions of the California Supreme Court are not fully consistent with the majority opinion in Globe;  those decisions limit coverage to damages expressly covered by the policies.  (See dissenting opinion of J. Brown, supra, at p. 756, 118 Cal.Rptr. 75, and decisions in Geddes & Smith, Inc. v. St. Paul Mercury Indemnity Co. (1959) 51 Cal.2d 558, 565, 334 P.2d 881;  Geddes & Smith, Inc. v. St. Paul Mercury Indem. Co. (1965) 63 Cal.2d 602, 47 Cal.Rptr. 564, 407 P.2d 868;  Hogan v. Midland National Ins. Co. (1970) 3 Cal.3d 553, 562, 91 Cal.Rptr. 153, 476 P.2d 825.)   Such damages, under liability policies like those here, are limited to damages to physical property and do not include losses which “though tangentially resulting from the negligence of the insured, are only indirectly related to the physical damage to property.”  (Globe, supra, 43 Cal.App.3d at p. 756, 118 Cal.Rptr. 75 (dis.opn.).)

The opinion in Globe does not closely analyze the question whether the parties to the insurance contracts there could reasonably be regarded as having intended coverage of fire suppression costs.   It is understandable in one sense that the Globe court should have assumed coverage, because there was no manifest or even suggested discrepancy between amounts unquestionably covered under the policies—fire damage to the insured or adjacent property—and the fire suppression costs involved.   Here, however, there is a potentially sharp contrast between the kinds of harms covered under the policies—pollution damage to owned property—and the restitutionary and remedial relief sought by the government for which coverage is in question.   As ARMCO has pointed out, the latter may far exceed any actual damage to the property.   And there is no precedent for interpreting liability insurance policies to cover exercise of the police power.   These facts highlight the unrealistic nature of FMC's assertion that such costs are within the reasonable contemplation of the parties to liability insurance contracts.

The Globe decision relied on principles of insurance law construction:  insurance contracts are read in light of the parties' reasonable expectations where they are ambiguous, and are construed against the insurer who drafted them in such instances.  (Globe Indem. Co. v. State of California, supra, 43 Cal.App.3d 745, 751, 118 Cal.Rptr. 75.)   But the question is one of objective expectations.   Many California cases treat the meaning of the term “damages” in a liability insurance policy as unambiguous, as a matter of law.  (E.g., Hackethal v. National Casualty Co., supra, 189 Cal.App.3d 1102, 234 Cal.Rptr. 853;  United Pacific Ins. Co. v. Hall, supra, 199 Cal.App.3d 551, 245 Cal.Rptr. 99;  Hallmark Ins. Co. v. Sup.Ct. (1988) 201 Cal.App.3d 1014, 247 Cal.Rptr. 638.)   Other authorities similarly analyze the reasonable expectations of parties to an insurance contract upon an objective standard, as an issue of law.  (E.g., O'Neill Investigations v. Ill.Emp. Ins. (Alaska 1981) 636 P.2d 1170, 1177;  Starry v. Horace Mann Ins. Co. (Alaska 1982) 649 P.2d 937, 939;  Deland v. Old Republic Life Ins. Co. (9th Cir.1985) 758 F.2d 1331.)   Thus the decisions in ARMCO and NEPACCO resolve the issue of coverage as a matter of law, finding that “damages” unambiguously does not mean response and remediation costs under CERCLA.   All of these decisions reach the salutary result of making questions of coverage resolvable on summary judgment, avoiding the expense to the insurer of defending a case in which it turns out there was no coverage.  (The matter is well discussed, e.g., in Deland v. Old Republic Life Ins. Co., supra, 758 F.2d 1331 [applying Alaska law].)

One California Court of Appeal has ruled on the issue of coverage of response costs under CERCLA and analogous statutes and has determined that such costs are covered except for preventive relief.  (Aerojet–General Corp. v. Superior Court (1989) 211 Cal.App.3d 216, 257 Cal.Rptr. 621, 258 Cal.Rptr. 684 [“Aerojet ”].)  Specifically, the Aerojet court reversed a summary adjudication that no portion of environmental cleanup and restoration costs imposed upon the insureds by state and federal governments constitutes damages within the meaning of the petitioner's liability insurance policies.   Aerojet interpreted the policy language as a matter of law and concluded that the term “damages” extended to some costs of complying with a mandatory injunction in environmental litigation.

In part, Aerojet is factually distinguishable from the case at bench.   In Aerojet “Petitioners' operations [causing pollution] involved the use of various toxic chemicals ․ [that] government regulatory agencies discovered ․ had entered the soil and groundwater beneath petitioners' facility, and had leached into the groundwater of neighboring properties and into the American River.”  (Id. at p. 220, 257 Cal.Rptr. 621, 258 Cal.Rptr. 684.)   The state and federal governments filed suit against Aerojet claiming, inter alia, their interests in subsurface and navigable waters.   The Court observed:  “In this state, all ownership of water is usufructuary;  ․ [t]he state's property interest in groundwater, as established by Water Code section 102 ․ is no less usufructuary than that of private ownership, and public waters may be duly used, regulated and controlled in the public interest.  [Citations.]  The state's public trust interest in the navigable portions of the American River is similarly sufficient for standing to claim damages caused by environmental pollution.”   (Id. at p. 229, 257 Cal.Rptr. 621, 258 Cal.Rptr. 684;  emphasis added.)   As the factual recitation of the parties' interests demonstrates, the governments' own property interests had been damaged by the pollution and the costs of remedying the damages fit more closely within the coverage provisions of the policy.   The situation was similar to one where due to the pollution discharge from an insured's property a neighbor sustains damages.   Coverage for such injury would come under the plain meaning of damages in the policy, whether the aggrieved party were a governmental agency or a private individual.

In our case, the parties have not presented undisputed facts establishing what part of the injured property, if any, belongs to the governmental agencies seeking to compel remediation.   It is certainly possible that some of the pollution may have invaded groundwaters, in which, according to Aerojet, the government may have a proprietary or usufructuary interest.   The parties do not discuss these issues.   Rather, they have asked this court to rule as a matter of law that those costs which unambiguously flow from compliance with a mandatory governmental injunction are not covered, and we agree that this is the law, with the caveat that we express no opinion on any costs assessed against FMC which may turn out to represent mitigation of damages to property interests rather than costs of compliance with a governmental mandate.   To the extent that the result in Aerojet rests on that court's perception that the governmental agencies there sought recompense for damage to proprietary governmental interests in property, we do not disagree with the decision;  but insofar as the decision holds that there is coverage for the costs of compliance with the police power, we must respectfully disagree.   Otherwise, we would disregard the unambiguous language of the policies here and completely distort well founded doctrines of insurance policy interpretation, as well as discard a mass of authority that compels our conclusion that, when the parties contracted for the insurance policies here, they could not reasonably have expected that the liability for damages provisions would cover response costs under CERCLA (or analogous provisions).

We summarize those aspects of Aerojet's analysis of the applicable law with which we disagree.   First, Aerojet perceived the Federal decisions which we have discussed—ARMCO and NEPACCO—as resting on technical distinctions of law and equity, and rejected those decisions because the differences in law and equity no longer obtain in California.   However, it is not analytically useful nor indeed accurate to say that forms of law and equity have been generally abolished in California.   Although the difference in forms of pleading no longer exists, other differences, including the right to a jury trial and the scope of available relief are well established.   Our task is to interpret a contract and by so doing, when ambiguities appear, to give due deference to the parties' objectively determined intentions, including the possibility that in formulating their agreement, the parties intended to exclude equitable injunctive relief from the scope of coverage.   Consideration of the theoretical niceties of the abolition of differences in legal and equitable relief does little to ease our task in this regard.

Aerojet observes that CERCLA response costs are not truly restitutionary because they do not involve the return of something wrongfully received.   (Id. 211 Cal.App.3d at p. 231, 257 Cal.Rptr. 621, 258 Cal.Rptr. 684.)   With due respect, we disagree with the Aerojet court's characterization of response costs under CERCLA.   The federal government seeks such costs as a direct exercise of the police power.   The government does not own the affected property;  rather it exercises its statutory authority to compel cleanup for the benefit of all the public at large.   None of the cases upon which Aerojet relies finds insurance coverage for the costs of compliance with a governmental directive.   We know of no such precedent.   The broad principle stated in Aerojet could render liability insurers responsible for the costs of doing business, such as mandatory compliance with a local zoning ordinance.   The Aerojet court does limit its holding by saying there is no coverage for preventive relief, but it does not make clear that the concept of preventive relief includes governmentally mandated remediation.   We do not believe the reasonable expectations of the parties to a liability insurance policy embrace such broad, if not limitless, coverage.   The stated purpose of a CERCLA action, as stated above, is equitable, not to compensate parties for harm, but to facilitate government cleanup to protect the public health.   A government action under CERCLA is an exercise of the police power.   Under CERCLA the government seeks “recovery of response costs from responsible parties ․ in order to replenish the Superfund.”  (United States v. Northeastern Pharmaceutical (8th Cir.1986) 810 F.2d 726, 731.)   The United States Supreme Court has explained that the purpose of CERCLA is not to compensate private parties for economic damage but rather “to facilitate government clean up of hazardous waste discharges and prevention of future releases.”  (Exxon Corp. v. Hunt (1986) 475 U.S. 355, 359–360, 106 S.Ct. 1103, 1108, 89 L.Ed.2d 364.)

Further, Aerojet is premature in concluding that as a matter of law CERCLA response costs imposed against a polluter cannot constitute return of property wrongfully received.   For one thing, such property return is not the only indicia of restitution, a concept which includes all the myriad ways in which one party may be called upon to restore another to his status quo ante.   Also, here the pollution may have resulted in part from a decision to cut the cost of doing business.   The company may have in fact saved expenses by operating in such a manner as to pollute the environment.   Under such circumstances it is possible that the cost of cleanup will constitute repayment of that economic benefit wrongfully received.

Aerojet criticized ARMCO for reliance on Hanna, which Aerojet refers to as an outdated 30–year–old case.  (Aerojet, supra, 211 Cal.App.3d at p. 232–233, 257 Cal.Rptr. 621, 258 Cal.Rptr. 684.)   However, the age of a decision is not ipso facto a reason to disregard it, particularly when no pertinent changes are cited which should lead a court to change time-honored construction of liability insurance coverage provisions.   On the contrary, if established precedent has given a settled meaning to the policy language, then that meaning constitutes in law the beginning and the end of the parties' reasonable expectations, and there is no justification for departing from that settled meaning.

Aerojet also states that the great weight of authority holds in accordance with its position.   That fact, however, we find debatable.   The only federal circuit decisions on the point hold to the contrary.

The most soundly based conclusion is that when the parties contracted for the insurance policies here they could not reasonably have expected that the liability for damages provisions would cover response costs under CERCLA, because there is no precedent for coverage of governmental exercise of the police power.   Therefore there is no coverage.

Principles of Insurance Law Construction

FMC argues that principles of construction of insurance contracts in California require that the word “damages” be given its lay or dictionary meaning rather than its technical meaning of damages “at law” as contrasted with equitable relief.  (Citing, e.g., Royal Globe Ins. Co. v. Whitaker (1986) 181 Cal.App.3d 532, 537, fn. 5, 226 Cal.Rptr. 435 [courts often look to standard dictionaries to determine the meaning an ordinary insured of average intelligence and common understanding would reasonably give to the words of the policy].  See also McMichael v. American Insurance Company (8th Cir.1965) 351 F.2d 665, 669;  Aerojet, supra, 211 Cal.App.3d at p. 224, 257 Cal.Rptr. 621, 258 Cal.Rptr. 684.)

Although dictionaries do define the term “damages” without reference to the technical distinction of damages at law and equitable relief, this fact sheds no light on the reasonable expectations of the parties who entered into these insurance contracts.   That issue, as stated in discussing ARMCO, above, does not turn on technical distinctions of the forms of relief;  it depends on whether the parties to liability insurance policies can reasonably have thought such policies to cover costs of complying with governmentally mandated costs of remedying widespread toxic pollution.   Inasmuch as past decisions such as Hanna, supra, have held no coverage existed for far more limited kinds of injunctive relief, it can hardly be said that the dictionary forms the beginning and the end here of the search for the parties' understanding of coverage.   In fact there is no objective support anywhere for the proposition that the parties must have intended CERCLA response costs to be within the scope of a liability insurance policy.   We conclude that the parties, as a matter of law, did not intend there to be coverage of the costs of compliance with a mandatory governmental injunction, such as response costs under CERCLA, under the policy language which is before us.

FMC also relies on the breadth of the policy language.   This language, it will be recalled, in some of the policies, covers damages and certain other liabilities, to wit, “damages, direct or consequential and expenses ․ on account of property damage,” and the “total sum which the Assured ․ becomes obligated to pay by reason of ․ property damage ․ claims, either through adjudication or compromise,” and including expenses for investigators, settlement and investigation of claims and suits.   Certainly this language is broad enough to encompass many expenses incidental to defense of a lawsuit, but nowhere in this language is there a concept broad enough to encompass response costs as defined by CERCLA.   In fact, the rule of interpretation that to include some things is to exclude others would require a different construction of this language.   Since it refers to many specific kinds of damages but does not mention injunctions or equitable restitution, the policy does not cover such relief.   To say this language is “broad” is meaningless;  the question is whether it includes a coverage definition which encompasses the relief being sought against FMC.   There is no such coverage included in this language, however “broad,” “flexible,” or general it may be.

Legislative History

FMC argues that the drafting history of the insurance policy provisions in question here shows unambiguously that the insurers intended the policies to cover CERCLA cleanup costs.   This assertion is demonstrably incorrect.   One of the facts offered in support of it is that the standard form policy language has been changed;  it formerly provided coverage for “liability imposed by law for damages,” and that provision has been changed to read “shall become legally obligated to pay as damages.”  (See e.g. Taylor, “The Liability Imposed by Law,” Insurance Counsel Journal at p. 38 (1945);  3 Cal.Ins.Law § 41.30(2)(a)—(b), pp. 41–51—41–52.)   This change proves nothing for these reasons:  (1) it was made in 1947 when CERCLA was not yet enacted;  (2) the removal of the phrase “at law” is as readily interpreted as removal of surplusage—because “damages” means a recovery “at law”—as it is interpreted to mean a desire to cover equitable relief;  (3) the authorities which have considered the change in language do not regard the change as having anything to do with a desire to cover equitable liability but rather view the language as broadening coverage to include liability arising in contract as well as that arising in tort.  (See e.g. Silva & Hill Constr. Co. v. Employers Mut. Liab. Ins. Co. (1971) 19 Cal.App.3d 914, 926–927, 97 Cal.Rptr. 498;  Taylor, supra, at p. 39–40.)   And finally, many of the cases discussed herein which deny coverage for equitable relief, such as Hanna, supra, postdate this linguistic change.

Civil Code Section 3281

FMC argues that Civil Code section 3281 defines “damages” for present purposes very broadly as any compensation for one who suffers damage.   First, we do not see that the label “broad” gives meaning to the statute or advances analysis.   Second, the statutory definition, in our view, is at odds with FMC's position here.   No governmental agency seeking to mandate cleanup of toxic pollution can be said to be “one who suffers damage.”   The government has not been damaged (unlike in Aerojet );  we do not deal with injury to property owned by these entities.   In fact, a substantial number of the alleged polluted sites subject to these actions are the insured's own property.   We have here exercise of the police power, pure and simple.   The language of the policies we construe further defines covered damages as those resulting from “injury to or loss, destruction or loss of use of property.”   But here, the relief sought against FMC does not depend on showing injury and the nature and extent thereof to owned property;  it is purely preventive or curative injunctive relief sought by a non-owner.   Protection of the environment, and the public at large, are the objectives, not the redress of damage to property owners for which they seek compensation.   Accordingly we believe the statute in its traditional definition of damage supports the insurers, not FMC.  (See e.g. Wainscott v. Occidental etc. Ass'n. (1893) 98 Cal. 253, 255, 33 P. 88 [defining “damage” under the statute as compensation in money for actual pecuniary loss in a fraud case].)

Public Policy Arguments

Finally, turning to the policy assertions of FMC, they are essentially that the government has insufficient funds to remedy toxic pollution and therefore it must proceed by way of injunction;  if insurance does not cover the costs governmental entities will be deterred in their cleanup efforts, presumably because the polluters themselves cannot or will not assume the costs.   We know of no factual support for any of these assertions in the record before us.   But regardless of our private views as to whose job it is to clean up pollution, the court's function is to apply the law.   Neither the government's unwillingness to budget funds for environmental cleanup nor a particular corporation's disinclination or inability to do the job bears on our judicial task to interpret the insurance contracts before us.   By our role we are limited to interpreting the language of these contracts in light of well-established legal principles.   We decline the invitation to assume the role of legislators.

We conclude that the policy provisions are not ambiguous regarding coverage of CERCLA response costs and related kinds of relief.   Our conclusion makes it unnecessary to ascertain the relative roles of FMC and its excess liability insurers in negotiating the policies at bench.

California Insurance Code Section 533.5

The California Legislature enacted Insurance Code section 533.5 on August 22, 1988, effective January 1, 1989.   The statute states that no insurance policy shall provide coverage for any fine, penalty or restitution in any civil or criminal action brought by the Attorney General, any district attorney, or any city prosecutor.   Any such provision is against public policy and void.1  Section 3 of the act provides that the new statute does not constitute a change in, but rather is declaratory of, existing law.   (Stats.1988, ch. 489, § 1, p. ––––.)

Section 533.5, literally read, cannot be applied to enforcement actions under CERCLA, since it cannot reasonably be read to apply to actions brought by federal enforcement agencies.   It will plainly apply to any actions which fall within its literal terms;  since the parties have not presented a record establishing the existence of such actions, we do not make any ruling upon the point.

It might be argued that section 533.5, even though not applicable by its terms, expresses a statutory policy which should also apply to actions seeking restitution brought by federal agencies such as those bringing the actions against FMC here.   The public policies expressed in statutes may properly be regarded as precedent for judicial decisions.  (See e.g. Green v. Superior Court (1974) 10 Cal.3d 616, 627, 111 Cal.Rptr. 704, 517 P.2d 1168.)   Such an approach may be worthy of consideration but is not necessary to our decision.

Ripeness for Summary Adjudication

The trial court stated in its opinion below that further discovery might throw light on the parties' expectations regarding coverage.   However, subjective expectations are not germane if the policy is not ambiguous.   The matter has been tendered to us as a matter of law, as it was to the courts in ARMCO, NEPACCO, and Aerojet, supra.   Accordingly extrinsic evidence is not necessary to aid the interpretation of the language and further discovery is not necessary to resolve the matter.   We note that the parties here stipulated to the appropriateness of writ review at this time.


We have issued an alternative writ of mandate in this matter and have heard oral argument.   We have concluded, for the reasons stated, that the liability insurance policies presented to the court on the motion for summary adjudication do not cover response and remediation costs under CERCLA or analogous statutes.   Therefore let a peremptory writ of mandate issue commanding respondent Superior Court of Santa Clara County to vacate its order denying summary adjudication of issues, and to enter in its place a new order granting said motion by providing that the policies tendered for construction do not cover such response and remediation costs imposed upon FMC as a result of the exercise of governmental police power.


1.   Section 533.5 provides in pertinent part:  “(a) No policy of insurance shall provide, or be construed to provide, any coverage or indemnity for the payment of any fine, penalty, or restitution in any civil or criminal action or proceeding brought by the Attorney General, any district attorney, or any city prosecutor, notwithstanding whether the exclusion or exception regarding this type of coverage or indemnity is expressly stated in the policy.  [¶] (b) [identical language regarding insurer's lack of duty to defend such claims] ․ [¶] (d) Any provision in a policy of insurance which is in violation of subdivision (a) or (b) is contrary to public policy and void.”

AGLIANO, Presiding Justice.

COTTLE and ELIA, JJ., concur.