FOSTER GARDNER INC v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH PA (1997)

This case concerns the meaning of the term “suit” as used in the standard language of CGL ¹ insurance policies.

The plaintiff is Foster-Gardner Inc. (Foster-Gardner ).   From 1959 through 1988, Foster-Gardner operated a wholesale pesticide and fertilizer business.   In 1992, Foster-Gardner received an “Imminent and Substantial Endangerment Determination and Order” (“Determination and Order”) from the Department of Toxic Substances Control of the California Environmental Protection Agency (Cal-EPA).   Cal-EPA issues such orders pursuant to the Hazardous Substance Account Act (HSAA), California's “Superfund” law.²  Such orders direct a party considered potentially responsible for pollution to investigate and remediate that pollution.   The Determination and Order in this case ordered Foster-Gardner to remediate pollution allegedly caused by Foster-Gardner's fertilizer and pesticide business.

A Determination and Order does not commence either a lawsuit in court or an adjudicative procedure before an administrative tribunal.   Instead, it is simply an order from an administrative agency.   It is only in the event that a potentially responsible party does not comply with a Determination and Order that an enforcement action in court might follow.   A Determination and Order, however, is more than a toothless demand.   The response of a potentially responsible party to a Determination and Order-before any court action is commenced-can have consequences which are irreversible in any subsequent court action.

Foster-Gardner had several CGL insurance policies.   The defendants are four insurers who issued these policies.³  Foster-Gardner demanded that these insurers “defend” the “proceedings” commenced by the Determination and Order.   To “defend” in this context would involve activities such as responding to demands for information, raising available defenses, attempting to apportion liability to other responsible parties, attempting to convince Cal-EPA that the insured has no responsibility for the identified pollution, participating in administrative proceedings directed toward preparation of a pollution remediation plan, and related activities directed toward protection of the insured.   The insurers either declined to undertake these activities or else failed to fund them to Foster-Gardner's satisfaction, and this lawsuit was filed.   Foster-Gardner then moved for summary adjudication of the insurers' duty to defend and for past defense costs.   The parties stipulated that the insurers' oppositions to Foster-Gardner's motions would be deemed cross-motions for summary judgment.   The trial court granted summary judgment in favor of the insurers, most notably on the theory that the insurers had no duty to defend because no “suit” had been commenced.   Foster-Gardner appeals.

The primary question is whether the HSAA “Superfund” proceedings commenced by Cal-EPA's Determination and Order do, or do not, constitute a “suit” as the term “suit” is used in the CGL policies.   The question is not free from doubt.   Cogent arguments have been raised by both sides, and reasonable minds can differ.   A prominent consideration is the prejudice that an insured can suffer before any proceeding is commenced in court.   No California case has directly answered the question.   Cases from around the country have reached conflicting conclusions.

The published portion of this opinion concludes that the proceedings commenced by the issuance of the Determination and Order in this case do constitute a “suit” under California law as the term “suit” is used in CGL policies.   The Determination and Order consequently did trigger the insurers' duty to defend.   Plaintiff was therefore entitled to summary adjudication as to duty to defend, and the insurers were not entitled to summary judgment on the theory that no “suit” had yet been commenced.   This conclusion rests on four factors:  the nature and irrevocable consequences of HSAA “Superfund” procedures which take place before a traditional lawsuit is filed in court, the lack of definition of the operative terms “suit” and “claim” in the insurance policies, the general standards for interpretation of insurance policies in California and how those standards have been applied, and the nature of the analysis applied by the California Supreme Court in AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 274 Cal.Rptr. 820, 799 P.2d 1253 (AIU ).

The unpublished portion of this opinion concludes:  1) that summary judgment as to past defense costs was properly denied to plaintiff because of lack of proof of the amount owing according to the terms of the CGL policies, and 2) that summary judgment in favor of the insurers on the alternative basis of the pollution exclusion should have been denied on the record presented.

I. The CGL Policies.

Each of the CGL policies states:

“ ․ [T]he company shall have the right and duty to defend any suit ․ and may make such investigation and settlement of any claim or suit as it deems expedient ․” (italics added.)

The policies thus clearly distinguish between a “suit” and a “claim,” although the policies contain no further definition of these terms.   In the event of a “suit,” an insurer has a duty to defend.   In the event of a “claim,” however, an insurer has no duty to defend, but instead has the discretionary right to investigate and settle “as it deems expedient.”   Plaintiff, urging a duty to defend, contends that the HSAA “Superfund” proceedings commenced by Cal-EPA's Determination and Order are properly classified as a “suit.”   The insurers, denying a duty to defend, contend that the HSAA “Superfund” proceedings constitute at most a “claim.”   The insurers further argue that if Cal-EPA's unilateral Determination and Order constitutes commencement of a “suit,” no meaning is left for the term “claim,” and that such a construction would therefore violate principles of contractual interpretation.

II. The Nature of HSAA “Superfund” Proceedings.

Since the issue is whether HSAA “Superfund” proceedings are, or are not, a “suit,” a review of the nature of such proceedings is necessary.   Disregarding refinements and qualifications not necessary to detail here, typical HSAA “Superfund” proceedings can be summarized as follows:

Cal-EPA has the authority to order, oversee, and perform or contract for remediation of hazardous substance releases.⁴  Whenever Cal-EPA determines that there may be an imminent or substantial danger to the public or the environment because of pollution or threatened pollution, Cal-EPA may issue a Determination and Order of the type issued to Foster-Gardner in this case.   The Determination and Order directs potentially responsible parties to remediate pollution or to pay for its remediation. (§ 25358.3.) A potentially responsible party must be given an opportunity to assert available defenses to the order. (§ 25358.3(a)(1).) ⁵ Although liability is for the most part strict, it is not joint.   Instead, if a potentially responsible party can establish by a preponderance of the evidence that only a portion of the required remediation costs are attributable to its activities, that party is obligated to pay only that portion. (§ 25363(a).)   Potentially responsible parties may opt to arbitrate their proportional liability. (§ 25356.3.) A potentially responsible party who does not submit to arbitration of proportional liability, but to whom liability is apportioned in an arbitration participated in by other potentially responsible parties, has no right to indemnification from any other potentially responsible party who has discharged its obligations pursuant to the arbitration. (§ 25356.6.)

Except in emergency situations, the HSAA “Superfund” proceedings typically involve several stages:  Although Cal-EPA generally already has a significant amount of information about a site before a Determination and Order is issued, the situation must thereafter be further investigated in order to formulate a remediation plan.   The Determination and Order issued in this case orders Foster-Gardner to engage in groundwater monitoring and to prepare a “Remedial Investigation and Feasibility Study” containing specified elements.   After a “Remedial Investigation Report” and a “Feasibility Study Report” are approved by Cal-EPA, a draft “Remedial Action Plan” must be prepared. (§ 25356.1.) The Determination and Order issued in this case ordered Foster-Gardner to prepare a draft Remedial Action Plan and to submit it to Cal-EPA for approval.   The draft Remedial Action Plan must be circulated for public comment;  affected agencies and landowners must be notified;  notices must be published in local newspapers of general circulation;  public meetings must be held, etc. (§ 25356.1(e).)   After these procedural steps, Cal-EPA reviews the draft plan, considers comments, and revises the draft plan as appropriate.   Negotiations and consultations between Cal-EPA and the potentially responsible party typically continue throughout this process.   In due course, Cal-EPA issues a final Remedial Action Plan. (§ 25356.1(f).)   The detailed 38-page Determination and Order in this case orders Foster-Gardner to prepare a “detailed Remedial Design and Implementation Plan” containing the technical specifications for implementation of the final Remedial Action Plan, and specifies various other terms and procedures.

The issuance of the final Remedial Action Plan is a critical event to an insured because the cost of the plan effectively fixes the amount of liability of a potentially responsible party.   Any remediation costs incurred by Cal-EPA are recoverable from the responsible party, with interest. (§ 25360 et seq.) ⁶  The costs of plan implementation can be greater if Cal-EPA implements the plan than they might be if the potentially responsible party implemented the plan itself.  (See, e.g., AIU, supra, 51 Cal.3d 807, 837-838, 274 Cal.Rptr. 820, 799 P.2d 1253.)   A potentially responsible party hence has an incentive to perform the plan itself rather than to defer to Cal-EPA.   Thus Cal-EPA and the responsible party might agree that the responsible party will implement the plan itself, under Cal-EPA's supervision.   Otherwise, Cal-EPA carries out the plan, and can later sue to recover the costs.

A potentially responsible party named in a Remedial Action Plan may contest the validity of the plan, but only by way of petition for writ of mandate. (§ 25356.1(g)(1).)   Such a petition must be denied if the plan is supported by substantial evidence. (§ 25356.1(g)(2).)   Judicial review is generally limited to the administrative record;  supplemental materials may be considered by the court only in limited circumstances. (§ 25357.5(a).)   Thus once Cal-EPA has issued a final Remedial Action Plan, a potentially responsible party is generally obligated for the full cost of executing that plan unless a court later finds that the administrative record does not contain substantial evidence to support the plan.   Although differences of opinion regarding alternative elements of a plan can reasonably be expected, it can also reasonably be predicted that approval of a Remedial Action Plan completely unsupported by substantial evidence would be a rarity.   Many alternative plans might be supportable by substantial evidence, but the plan chosen by Cal-EPA will always prevail in such circumstances.   A responsible party will therefore almost certainly be bound to pay the costs of whatever plan is chosen by Cal-EPA before any court action is filed.

If the process proceeds to the point at which Cal-EPA has incurred remediation costs and seeks to recover them, a lawsuit in court is then necessary. (§ 25360.)   In such a lawsuit, the burden rests on Cal-EPA to prove one of two things by a preponderance of the evidence:  either that the pollution occurred after the potentially responsible party acquired the property, or that the potentially responsible party acquired the property with actual or constructive knowledge of existing pollution. (§ 25360.2(c) & (d).)   If Cal-EPA makes one of these two showings, the liability of the owner is established.   The amount of liability is equal to the costs of implementing the Remedial Action Plan previously formulated.

The statutory process is therefore a hybrid of administrative and litigative procedures:  some of the (limited) potential defenses to liability are determined in a subsequent court proceeding, but many defenses are foreclosed and remediation costs are fixed by administrative proceedings completed before any court proceeding is filed.   In California, remediation costs fixed by these pre-lawsuit proceedings constitute “damages” within the meaning of CGL insurance policies, and-subject to exclusions or other policy defenses that may apply-a potentially responsible party is therefore entitled to recover these costs from its insurers.  (AIU, supra, 51 Cal.3d 807, 274 Cal.Rptr. 820, 799 P.2d 1253.)   The proposition that there is no duty to defend HSAA “Superfund” proceedings, coupled with the AIU decision, thus raises the somewhat anomalous prospect that an insurer need not “defend” HSAA “Superfund” proceedings even though that insurer will be liable to pay the “damages” quantified in those proceedings.

The HSAA also contains penalty provisions designed to coerce cooperation and compliance.   A potentially responsible party who fails to comply with a Determination and Order issued by Cal-EPA is subject to civil penalties of up to $25,000 for each day of noncompliance. (§ 25359.2.)   This liability may be imposed either in a civil action or pursuant to the Administrative Procedure Act. (§§ 25359.2 and 25359.3.)   Additionally, a party who fails, “without sufficient cause,” to comply with a Determination and Order issued by Cal-EPA is liable to Cal-EPA for “damages equal to three times the amount of any costs” incurred by Cal-EPA “as a result of the failure to take proper action.”   The transmittal letter which accompanied the Determination and Order in this case advised Foster-Gardner that “you may be liable for substantial penalties and punitive damages if you do not comply with the order.”   Cal-EPA may also seek injunctive or other enforcement assistance from the courts.

III. Case Law.

A. The “literal meaning” approach versus the “functional” approach.

The issue of whether proceedings instituted by a pollution remediation order (such as the Determination and Order involved in this case) are a “suit” or no more than a “claim” has been litigated around the country.   These cases have arisen as a consequence either of underlying CERCLA proceedings, underlying state proceedings pursuant to statutes modeled after CERCLA (similar to the HSAA), or both.   The courts ruling on this issue have typically applied one of two competing lines of reasoning.

The first competing approach is a “literal meaning” approach.   This approach finds that the term “suit” unambiguously refers to a traditional lawsuit filed in a court, and concludes that pollution remediation orders and related pre-lawsuit proceedings do not trigger a duty to defend because they are not literally a “suit” in a court.   Courts which take this approach and reach this conclusion generally also find that remediation costs are not “damages” within the meaning of CGL policies.

The second approach is a “functional” approach.   This second approach does not construe the term “suit” as limited to a technically exact meaning, finds that the legal procedures created by environmental protection statutes have the functional attributes and ultimate consequences of a lawsuit filed in court, finds the undefined term “suit” ambiguous, construes that ambiguity against the insurer, and finds that pre-lawsuit remediation proceedings can be a “suit.”   Courts which take this second approach and reach this second conclusion generally also find that environmental response costs are “damages” within the meaning of CGL policies.

Some courts apply a “hybrid” approach.  (See, e.g., Lapham-Hickey Steel v. Protection Mut. Ins. (1995) 166 Ill.2d 520, 211 Ill.Dec. 459, 463-464, 655 N.E.2d 842, 846-847 (Lapham-Hickey ).)   These courts essentially divide the “functional” approach into two parts.   In one part are cases which treat even preliminary notices from environmental agencies as “suits.”   In the other part are cases which do not consider a mere preliminary notification to be a “suit,” but which find that a proceeding becomes a “suit” if it progresses beyond the mere notification stage.   The Determination and Order received by Foster-Gardner in this case is considerably past the mere notification stage, hence this refinement of the “functional” approach need not be considered in resolution of the instant case.   Appellate examples of the “literal meaning” and “functional” approaches are examined next below.⁷

B. The “literal meaning” approach.

  1) The City of Edgerton case.a) The Edgerton Majority Approach.

Although City of Edgerton v. General Cas. Co. (1994) 184 Wis.2d 750, 517 N.W.2d 463 (City of Edgerton ), involved a procedural stage somewhat more preliminary than the Determination and Order sent to Foster-Gardner in the instant case, the four-to-three Wisconsin Supreme Court decision in City of Edgerton exemplifies the divergence between the “literal meaning” and the “functional” approaches.  City of Edgerton involved pollution resulting from the operation of a landfill.   The City and a sand and gravel company were both insured by CGL policies containing the familiar language distinguishing “suit” and “claim.”  (184 Wis.2d 750, 517 N.W.2d 463, 470-472.)   Both the Federal EPA and the Wisconsin Department of Natural Resources initially sent letters to the insureds requesting information.   Additional letters and notices followed, warning that unless a “Consent Order” were negotiated, the environmental agencies would remediate the pollution themselves and sue to recover costs, and that the insureds might then be subject to forfeitures and treble damages.   The majority characterized the issue as whether the duty to defend a CERCLA proceeding arises at the administrative level.  (184 Wis.2d 750, 517 N.W.2d 463, 472.)

The majority noted that although “comprehensive analyses of insurance policy language and policy drafting records have been performed by courts across the country, there has been no definitive, nationwide resolution of the ultimate issue-whether the general comprehensive liability policy [sic]-the ‘CGL’-imposes a duty to defend a federal or state demand for environmental remediation and cleanup costs.   Instead, courts have developed competing definitions of what constitutes a ‘suit’ when environmental cleanup is required.  (Edgerton, supra, 517 N.W.2d 463, 471, fn. omitted.)  “[T]he split among the courts is far more self-evident than a majority view.”  (Id. at p. 471, fn. 13.)   The majority observed that “[s]ome courts have concluded that PRP⁸ letters have a unique nature within the context of a CERCLA administrative proceeding.   These courts have held that the receipt of PRP letters is the ‘functional equivalent of a suit’ because (a) the letters maintain a confrontational and adversarial posture, and (b) they create the spectre of devastating financial consequences if voluntary cooperation is not forthcoming.”  (184 Wis.2d 750, 517 N.W.2d 463, 472.)

The majority in City of Edgerton rejected the “functional equivalent” approach, ruling that “neither a PRP letter nor a comparable notification letter by a state agency such as the [Wisconsin Department of Natural Resources] triggers the insurers' duty to defend.”  (City of Edgerton, supra, 184 Wis.2d 750, 517 N.W.2d 463, 473.)   The reason for this conclusion was that such letters do not have the “attributes” of a “suit.”   (184 Wis.2d 750, 517 N.W.2d 463, 474.)   The majority found that “the primary attribute of a ‘suit’ is that parties to an action are involved in actual court proceedings, initiated by the filing of a complaint,” and that “definitions of suit or legal process all involve a court action.”  (184 Wis.2d 750, 517 N.W.2d 463, 474.)   The majority in City of Edgerton characterized the letters and notices from the environmental agencies as requests for “voluntary participation in environmental cleanup efforts.”   While acknowledging that there had been “some movement beyond the fact-gathering stage,” the majority found that “there was no movement into the realm of a suit.   The correspondence served to inform the PRPs of action which may be pursued, or not, depending upon the response by the [insureds].   This letter cannot be considered the equivalent of a service of process so as to initiate a suit․  [¶] ․ Though the tone of the correspondence may be termed confrontational, neither the EPA's letters nor the [Wisconsin Department of Natural Resources'] letters by themselves impose liability ․ if the [insureds] failed to respond to the letters, that failure alone would not authorize the assessment of fines.   Instead, something more in the form of a court proceeding would be required to ‘force or compel the insured to take action or suffer serious consequences.’  [Citations.]”  (184 Wis.2d 750, 517 N.W.2d 463, 467, 475.)

The majority cited the rule that “the words of a policy are to be given a plain and ordinary meaning․  The meaning of the terms of the policy is assessed by a reasonable person in the position of the insured and that reasonable insured's expectations of coverage․  However, an insured's expectations may not be satisfied in contradiction to policy language which clearly identifies the scope of the insured's coverage.”   The majority went on to “find no ambiguity in the term ‘suit’ as it has been used in the insurance policies.  ‘Suit’ denotes court proceedings, not a ‘functional equivalent.’․ the word ‘suit’ is easily understood and unambiguous to a reasonable policyholder.   The proof is in the decisions that hold that a ‘PRP letter’ is the ‘functional equivalent of a suit.’   Either there is a suit or there is not.   When there is no suit, there is no duty to defend.”  (City of Edgerton, supra, 184 Wis.2d 750, 517 N.W.2d 463, 476-477.)

As an additional reason for finding that the environmental cleanup demands did not commence a “suit,” the City of Edgerton majority opined that such a finding would upset the underwriting assessments that had yielded the premium levels paid, noting that “[t]he original risk assessment becomes a nullity if the language of the policy is redefined in order to expand coverage beyond what was planned for by the insurer in the contract of insurance.”  (City of Edgerton, supra, 184 Wis.2d 750, 517 N.W.2d 463, 476, fn. 26.)   Thus, the majority found, to term the environmental cleanup demands a “suit” would put the insurer “in the position of anticipating a coverage expectation for which it did not contract or receive payment.   In this case, no complaint has been filed which would initiate a suit and invoke the insurers' duty to defend.   Therefore, no matter how coercive the language of the [Wisconsin Department of Natural Resources] letter was considered to be, it was used within the realm of an administrative proceeding.   It did not have the effect of initiating a suit.”  (184 Wis.2d 750, 517 N.W.2d 463, 477.)

The majority went on to find that “the CGL policies in this case do not provide coverage for Superfund response costs, since such costs do not constitute damages.”  (City of Edgerton, supra, 184 Wis.2d 750, 517 N.W.2d 463, 477.)   In reaching this conclusion, the majority distinguished between damages and equitable relief, and found that “[t]he term ‘damages' does not encompass the cost of complying with an injunctive decree.”  (184 Wis.2d 750, 517 N.W.2d 463, 478.) “․ as an equitable form of relief,” wrote the majority, “response costs were not designed to compensate for past wrongs;  rather, they were intended to deter any future contamination by means of injunctive action, while providing for remediation and cleanup of the affected site.   This type of relief is distinct from that which is substitutionary-monetary compensation to make up for a claimed loss․  Although the dissent takes the position that the insurers should be responsible for the response costs, the insurers never assumed a contractual responsibility to pay to remove hazardous materials and to prevent future harm.”  (184 Wis.2d 750, 517 N.W.2d 463, 478-479).⁹

b) The Edgerton dissenting view.

The three dissenters in City of Edgerton cited five reasons for disagreeing with the majority's opinion that there was no duty to defend.   First, the dissenters noted that “[w]ords in a policy ․ must be interpreted to mean what a reasonable person in the position of the insured would have understood them to mean” and opined that “a reasonable understanding of the word ‘suit’ is not limited to an action filed in court․  [¶] From the point of view of a reasonable policy holder, official letters from a federal or state agency advising an insured of liability, with increasing penalties if the insured does not respond, appear to be an adversary's attempt to gain an end by a legal process.   Such administrative proceedings may force the insured to hire technical experts and lawyers to protect its interests and may terminate in an action in court.   Thus to the insured an administrative action is as coercive a legal process as an action filed in a court of law.”   The dissenters therefore opined that “[t]he only meaning of the word ‘suit’ in the insurance policy which comports with an insured's objectively reasonable expectations is that it signifies either a court action or an attempt to gain an end by a legal process.”  (City of Edgerton, supra, 184 Wis.2d 750, 517 N.W.2d 463, 480.)

 Second, the dissenters rejected the majority's interpretation of the word “suit” as “neither reasonable nor wise because it fosters litigation” and is in conflict with the litigation-avoidance policy of CERCLA.  “If, as the majority opinion holds,” wrote the dissenters, “the administrative action does not activate the duty to defend, the insured may refuse to cooperate with the government in order to force the government to file a formal complaint.”   (City of Edgerton, supra, 184 Wis.2d 750, 517 N.W.2d 463, 480.) ¹⁰

Third, the dissenters found that “an examination of the statutory proceedings demonstrates that administrative enforcement is part of litigation.   The government has discretion about the type of action to use to combat pollution.   By choosing a more expensive option the government can adversely affect the insured's rights.   Because damages might be determined before the parties ever get to court, the need for representation is thus perhaps greatest at the administrative level and the administrative process is obviously part of the litigation process which triggers the obligation to defend.”  (City of Edgerton, supra, 184 Wis.2d 750, 517 N.W.2d 463, 480 [citing cases noting that “agency determinations may have preclusive effect in court” (id. at p. 481)].)

Fourth, the dissenters rejected the proposition that the word “suit” must refer to a lawsuit simply because Wisconsin case law (similar to California case law) holds that duty to defend is normally determined by referring to the allegations of a complaint.   The dissenters noted that the cases so holding all involved situations in which a complaint had in fact been filed, and that these cases therefore had no occasion to consider the scope of duty to defend when no formal complaint had been filed in a court.  (City of Edgerton, supra, 184 Wis.2d 750, 517 N.W.2d 463, 481.)

Fifth, the dissenters found the majority's definition of “suit” to be “antiquated.”   They noted that “[i]n our modern legal world many forms of liability are determined outside the courtroom.”   The dissent went on to complain that the “outmoded” definition of “suit” used by the majority defeats the legislative policy of minimizing litigation.  (City of Edgerton, supra, 184 Wis.2d 750, 517 N.W.2d 463, 481.) ¹¹

Finally, the dissenters concluded that environmental response costs are “damages” under a CGL policy.  (City of Edgerton, supra, 184 Wis.2d 750, 517 N.W.2d 463, 481-482;  see also Public Ser. Corp. v. Heritage Mut. Ins. Co. (App.1996 ) 200 Wis.2d 821, 548 N.W.2d 544 and Wisconsin Public Service Corp. v. HMIC (1997) 209 Wis.2d 160, 561 N.W.2d 726 [distinguishing City of Edgerton:  although response costs not covered, negligent damage to third party property is covered].)

  2) The Lapham case.

In Lapham-Hickey, supra, 166 Ill.2d 520, 211 Ill.Dec. 459, 655 N.E.2d 842, the Supreme Court of Illinois considered whether “defense costs associated with investigation of environmental contamination” were covered under an “all risks” policy containing the same “suit” and “claim” language as Foster-Gardner's CGL policies.¹²  In Lapham-Hickey, the insured received a proposed consent order from the responsible environmental agencies together with an order to undertake “a remedial investigation and feasibility study” of the affected site.   Rather than agreeing to the proposed consent order, the insured entered into negotiations.   The negotiations resulted in a “no-action” letter.   The insured then filed a declaratory relief and breach of contract action against its insurer, seeking recovery of the costs incurred.

The Illinois Supreme Court surveyed cases from around the country and grouped the courts deciding them into three categories, stating:  “Some courts have determined that the receipt of a PRP letter invokes an insurer's duty to defend․  These courts have found the word ‘suit’ ambiguous and given the word a broad definition in light of the perceived coercive impact of a PRP letter and the ability of the EPA to enforce strict liability in CERCLA actions.”   The second group took a “middle-of-the-road” approach, determining “that the word ‘suit’ should be liberally interpreted in favor of the insured, but have then analyzed the facts of the case, including the coerciveness of any letters and the seriousness of the government effort, to determine if the receipt of a PRP letter itself or a notification letter from a State agency invokes the insurer's duty to defend․  The final group of courts have found that the word ‘suit’ is unambiguous and have given the word its plain meaning, which requires the commencement of some action in a court of law before an insurer's duty to defend is triggered;  thus, the issuance of a PRP letter does not invoke the duty to defend.”  (Lapham-Hickey, supra, 166 Ill.2d 520, 211 Ill.Dec. 459, 463-464, 655 N.E.2d 842, 846-847.)   The Illinois Supreme Court unanimously agreed with the third group of cases.

The court noted that “[a]lthough the word ‘suit’ is not defined in the [policy], the usage of the word is clear and unambiguous.   Thus, the word must be given its plain and ordinary meaning.   In common usage, the word ‘suit’ refers to a proceeding in a court of law․  In conversation, the word ‘suit’ is used to connote an attempt to gain the resolution of an issue within the court system.   The primary attribute of a suit is that the parties to the action are involved in actual court proceedings․  [¶] ․ The definition of the word ‘suit’ as requiring an action in a court of law is further supported by analyzing the connection between the filing of a complaint and the duty to defend.   Whether an insurer's duty to defend has arisen is determined by looking to the allegations in the underlying complaint and comparing these allegations to the policy provisions ․ the duty to defend extends only to suits and not to allegations, accusations or claims which have not been embodied within the context of a complaint.”  (Lapham-Hickey, supra, 166 Ill.2d 520, 211 Ill.Dec. 459, 463, 655 N.E.2d 842, 847.)   The court further found that “[i]f the word ‘suit’ was broadened to include claims, in the face of policy language which distinguishes between the two, any distinction between these two words would become superfluous.”  (166 Ill.2d 520, 211 Ill.Dec. 459, 463-464, 655 N.E.2d 842, 847-848.)   The court thus ruled that the insured was not entitled to recover the defense costs it had expended.

  3) Other “literal meaning” cases.

Patrons Oxford Mut. Ins. Co. v. Marois (Me.1990) 573 A.2d 16 (Patrons Oxford ) was decided by the Supreme Court of Maine and involved a “special multi-peril policy” with the same language concerning “duty to defend any suit” as the Foster-Gardner CGL policies.   The insureds in Patrons Oxford owned a market with gasoline tanks.   The tanks leaked.   The insureds received clean-up notices and incurred response costs.

The Maine Supreme Court first dealt with the issue of whether the defense costs incurred by the insureds came within the meaning of the term “damages” as used in the policy, noting “[s]ome courts have construed this or similar language as limiting coverage to traditional common law damages recovered by third parties, thereby excluding coverage for equitable relief such as clean-up efforts or restoration.  [Citations.]  Other courts have read the language to extend coverage to any expense an insured incurs to mitigate or prevent property damage ․ [Citations] ․ [¶] ․ we do not believe the ‘ordinarily intelligent insured’ engaged in a ‘more than casual reading of the policy’ [citation] would consider them to be ‘sums which the insured [is] legally obligated to pay as damages.’   Instead, they are the expenses the [insured] may be required to incur to halt continuing pollution and property damage.   There may be a substantial difference between these remedial costs and the amount of damages the [insured] would have to pay to property owners for damages to their property.   It is the latter expenditure upon which the parties have contracted and upon which the insurance premium is based.”   (Patrons Oxford, supra, 573 A.2d 16, 18-19.)   The court found no ambiguity in the word “damages,” stating that “[a]mbiguity (as opposed to outright lack of understanding) is created only by converting an insured's hope or assumption that every out-of-pocket payment is covered into a part of the contract's language.”   The court thus unanimously ruled that the insured was “not confronted with any liability for damages.”  (573 A.2d 16, 19.) ¹³  Having found that the insured had incurred no “damages”, the Maine Supreme Court turned to the issue of duty to defend, and found that “[u]nder Maine's statutes, the [Maine Department of Environmental Protection] cannot recover damages in the administrative proceeding it has brought, but can only compel a clean-up․  Thus, there has been no ‘suit against the insured seeking damages,’ and the insurer has no present duty to defend.” ¹⁴  (573 A.2d 16, 20.)

In Ray Industries, Inc. v. Liberty Mut. Ins. Co. (6th Cir.1992) 974 F.2d 754 (Ray ), the Sixth Circuit applied Michigan law to the question of whether CERCLA proceedings trigger a duty to defend under a CGL policy.   The court applied the plain meaning approach, finding that the term “suit” has a “plain and unambiguous meaning” that excludes CERCLA proceedings, because a “suit” is “an attempt to obtain an object in the courts.   The term refers to formal legal proceedings, as opposed to demands and other tactics that, however powerful, are not enforced by a court of law.”  (974 F.2d 754, 761.)   The court noted the distinction between the terms “suit” and “claim,” and expressly construed the term “suit” narrowly in order to maintain the meaning of the term “claim.”  (974 F.2d 754, 761-762.)   The court further noted “that CERCLA itself recognizes a distinction between lawsuits and PRP notice letters.   The letter in this case merely warned [the insured] of its potential liability․  But the EPA has express authority to file a lawsuit to recover, among other thing, ‘all costs of removal or remedial action’ incurred by the government, [citation];  it has simply chosen not to do so in this case.   Thus, the definition of ‘suit’ that we adopt recognizes the variety of options available to the EPA in enforcing CERCLA.   Like other claimants, the EPA threatens litigation and makes other efforts to pressure potentially liable parties;  but these threats, however seriously they may be taken, do not constitute a lawsuit.”  (974 F.2d 754, 762.)

Although the Ray court rejected the proposition that an environmental clean-up demand letter triggered a duty to defend, it emphasized “that we fully recognize the seriousness of such a letter.   By enacting CERCLA, Congress has given extraordinary powers to the EPA, and any company that received a PRP notice letter would certainly be justified in taking it very seriously.   PRP letters may even represent a unique legal creation, with no true parallel in any other area of administrative law.   But the fact that Congress chooses to create a new and more powerful type of claim does not justify our deviating from the plain language of the contracts․  By limiting its duty to defend to ‘suits,’ [the insurer] unambiguously demonstrated its intention to avoid responsibility for any action that fell outside the traditional and well-recognized meaning of that term.   This court will not deprive [the insurer] of the benefit of its bargain by forcing it to insure against the creation of a new type of legal action, a risk for which it was not paid.”  (Ray, supra, 974 F.2d 754, 764.)

Ray thus ruled that there was no duty to defend under Michigan law.   Ray's application of Michigan law, however, proved inconsistent with a ruling issued by the Michigan Supreme Court two years later.   To that we now turn.

C. The “functional” approach.

  1) The Michigan Millers case.

The four-to-three decision in Michigan Millers Mut. Ins. v. Bronson Plating (1994) 445 Mich. 558, 519 N.W.2d 864 (Michigan Millers ), also exemplifies the conflict between the “literal meaning” approach and the “functional” approach.   In Michigan Millers, the insured had CGL policies with the standard “suit” and “claim” language.   The insured received a PRP letter from the EPA. The issue was whether the proceedings instituted by the PRP letter constituted a “suit.”

A majority of the Michigan Supreme Court first determined that the term “suit” could refer to “some legal action other than a court proceeding initiated by a complaint.”  (Michigan Millers, supra, 445 Mich. 558, 519 N.W.2d 864, 868.)   The court noted that the term “suit” was not defined and that there was a split of authority regarding its meaning, then canvassed dictionary and other potential meanings.   The majority found that “a broader definition of the term ‘suit’ reflects more accurately the modern realities of our legal system ․ gravitation is evident toward less formal and more expeditious means of dispute resolution.   This movement has manifested itself in the ․ increased authority given to administrative agencies to resolve disputes, so that the functional equivalents of suits brought in a court of law have developed ․ this point is particularly valid in the context of CERCLA actions ․ where significant legal prejudice may develop if the PRP fails [to comply].”  (445 Mich. 558, 519 N.W.2d 864, 870.)

The court next examined the contents of the PRP letter and found “that the legal proceeding initiated by the receipt of that notice is the functional equivalent of a suit brought in a court of law.   Of critical importance is the creation of the administrative record and the role it may play in future litigation.”  (Michigan Millers, supra, 445 Mich. 558, 519 N.W.2d 864, 871.)   The court noted that “the total cost of the project will also be determined before litigation is brought.   The significant authority given to the EPA in such matters allows it essentially to usurp the traditional role of a court of law in determining and apportioning liability.”  (445 Mich. 558, 519 N.W.2d 864, 871-872.)

The majority emphasized that they were preserving the distinction between “suit” and “claim” because they were not suggesting that “every request for relief should be considered the initiation of a suit that the insurers are obligated to defend.   Rather, our determination on this issue is made primarily based on the unique aspects of CERCLA action and the authority given to EPA under the statute․  [¶] Unlike the garden variety demand letter, a PRP notice carries with it immediate and severe implications.   Generally, ․ a party asserting a claim can do nothing between the occurrence of the tort and the filing of the complaint that can adversely affect the insureds' rights.   However, in a CERCLA case, the PRP's substantive rights and ultimate liability are affected from the start of the administrative process․  Accordingly, we do not disturb the basic claim/suit distinction contained within the subject insurance policies.”  (Michigan Millers, supra, 445 Mich. 558, 519 N.W.2d 864, 871 fn. 13;  see also Aetna Cas. and Sur. Co., Inc. v. Pintlar Corp. (9th Cir.1991) 948 F.2d 1507, 1516-1517.)   The majority concluded by finding “that the term ‘suit,’ as used in the insurance policies at issue, is ambiguous and capable of application to nontraditional legal actions that are the functional equivalent of a suit brought in a court of law ․ under this definition, the PRP letter received by [the insured] constituted the initiation of a ‘suit’ that the insurers were obliged to defend․”  (Michigan Millers, supra, 445 Mich. 558, 519 N.W.2d 864, 872.)

The dissenters found that “the word ‘suit,’ as used in the contract, unambiguously refers to court proceedings instigated by the filing of a complaint.”  (Michigan Millers, supra, 445 Mich. 558, 519 N.W.2d 864, 872.)   The dissenters reviewed the cases, emphasized the claim/suit distinction and the role of a complaint in measuring the duty to defend, and rejected the “functional” approach adopted by the majority.

  2) The Hazen Paper case.

Hazen Paper v. U.S. Fidelity and Guar. (1990) 407 Mass. 689, 555 N.E.2d 576 (Hazen ), was a unanimous decision of the Massachusetts Supreme Court.   Hazen had sent solvents to a recycling facility which the EPA found contaminated, and the EPA sent Hazen a PRP letter.   The issue was whether a “suit” had been commenced within the meaning of Hazen's CGL policies.

The Massachusetts Supreme Court noted that “[o]bviously, on the record no lawsuit has been brought.   Literally, there is no suit.   That fact alone has been sufficient to provide the answer for some courts․  It is, however, not sufficient to provide an answer for us.”  (Hazen, supra, 407 Mass. 689, 555 N.E.2d 576, 579.)   The court stated that “[a] superficial view of the EPA letter might lead one to conclude that it is not analogous to a complaint․  [¶] The question is a close one.   The authorities are divided on the point.   We conclude that the litigation defense protection that Hazen purchased from [the insurer] would be substantially compromised if [the insurer] had no obligation to defend Hazen's interests in response to the EPA letter․  [¶] Since the standard policy language was drafted, the EPA processes for the enforcement of obligations to aid in the cleaning up of environmental pollution have moved away from the use of lawsuits toward the use of agency demands for participation in remedial action.   Those requests are dangerous for the alleged polluter to ignore because they often result in dispositive extrajudicial solutions.   The consequences of the receipt of the EPA letter were so substantially equivalent to the commencement of a lawsuit that a duty to defend arose immediately.   The EPA letter was not the equivalent of a conventional demand letter based on a personal injury claim․  [¶] The situation was such that the opportunity to protect Hazen's interests could well have been lost, long before any lawsuit would be brought.”  (407 Mass. 689, 555 N.E.2d 576, 580-581.)   The court thus found that the PRP letter did commence a “suit.”   The court went on to find that pollution remediation costs are “damages.” ¹⁵

  3) The Coakley case.

Coakley v. Maine Bonding and Cas. Co. (1992) 136 N.H. 402, 618 A.2d 777 (Coakley ), was a three-to-two decision of the New Hampshire Supreme Court, also concerning the meaning of “suit” in a CGL policy.  Coakley noted that one meaning of the undefined term “suit” was “ ‘the attempt to gain an end by legal process:  prosecution of a right before any tribunal.’ ”  (136 N.H. 402, 618 A.2d 777, 786.)   The court stated that “[t]he PRP notice, like a civil complaint, alerted the [insured] that the EPA had begun a legal process to conclusively and legally determine, subject only to review for abuse of discretion ․ the appropriate ‘response activities' liable parties must perform or pay for to abate the pollution․  This determination is akin to the determination of ‘damages' in a tort suit․  [¶] While it is true that the PRP notice does not purport to establish the [insured's] liability for the pollution, CERCLA liability is strict and has few exceptions․  One would not expect a traditional tort defendant to concede the ‘damages' portion of a case, and it likewise would be myopic to conclude that the [insured's] rights are not substantially determined by the administrative process described in the PRP notice․  [¶] It hardly needs saying that an administrative order manifests an ‘attempt to gain an end by legal process.’․   Administrative proceedings are the equivalent of court proceedings for purposes of the ‘suit’ requirement.”  (136 N.H. 402, 618 A.2d 777, 786-787.)   The majority also found that pollution remediation costs are “damages.”

The dissent in Coakley concluded that environmental response costs are not “damages,” and for that reason found that the insurer had no duty to defend.

  4) Other “functional approach” cases.

Avondale Industries, Inc. v. Travelers Indem. Co. (2nd Cir.1989) 887 F.2d 1200 (Avondale ), was decided by the Second Circuit applying New York law.   In Avondale, an insured under a CGL policy had received a letter from Louisiana authorities demanding information and formulation of a plan to remediate pollution.   The Second Circuit stated “[w]e have little trouble viewing this administrative proceeding as a suit.   The demand letter commences a formal proceeding against [the insured], advising it that a public authority has assumed an adversarial posture toward it, and that disregard of the [environmental agency's] demands may result in loss of substantial rights by [the insured].   These strike us as the hallmarks of litigation, and are sufficiently adversarial to constitute a suit under New York law and within the meaning of the policy.  [¶] ․ [¶] [I]nasmuch as [the insured] might be held liable for cleanup costs, [the insurer] was obliged to defend.   Moreover, viewed from the insured's perspective, we think an ordinary businessman reading this policy would have believed himself covered for the demands and potential damage claims now being asserted in the [environmental agency's] administrative proceeding.”  (887 F.2d 1200, 1206-1207.)   The court thus also found that response costs were “damages.”  (See also Aetna Cas. and Sur. Co., Inc. v. Pintlar Corp., supra, 948 F.2d 1507, 1516-1517 [applying Idaho law].)

A.Y. McDonald Industries, Inc. v. INA, (Iowa 1991) 475 N.W.2d 607, involved a proceeding against an insured under RCRA.¹⁶ The RCRA proceedings were more formalized than the proceedings in which Foster-Gardner is involved;  the RCRA proceedings involved a hearing before an administrative law judge followed by an appeal to the administrator of the EPA. The Iowa Supreme Court unanimously ruled that these proceedings constituted a “suit” pursuant to a CGL policy.   The court recited the law that “[w]hen words are left undefined in a policy we do not give them a technical meaning ․ Rather we give them their ordinary meaning, one which a reasonable person would understand them to mean.   We do not give them the meaning only a specialist or expert would understand․  And if such words are susceptible to two interpretations, the interpretation favoring the insured is adopted.”  (475 N.W.2d 607, 619, 627.)   The court noted that, in addition to the narrow definition of an action in court, the word “suit” has the broader meaning of “ ‘the attempt to gain an end by a legal process.’ ”  (475 N.W.2d 607, 627.)   Finding ambiguity in the term, the court adopted the broader meaning.   Noting that the EPA demand letter there involved had broad consequences, the court found that it commenced a “suit.”  (475 N.W.2d 607, 628-629.)

D. The Approach of the AIU case.

In AIU, supra, 51 Cal.3d 807, 274 Cal.Rptr. 820, 799 P.2d 1253, the issue was not the meaning of the term “suit,” but instead whether cleanup and other response costs were “damages” within the meaning of a CGL policy.   Although AIU did not deal with the “suit” issue, it is instructive regarding the type of analysis that should be applied in resolving such issues.   The arguments of the opposing sides in AIU split along the same type of “literal meaning” versus “functional approach” distinction reviewed above in connection with the “suit” issue.   In resolving the “damages” issue, the California Supreme Court in AIU unanimously took a non-literal, functional approach.

The Court first reviewed the rules governing interpretation of insurance policies, noting that “[i]n the insurance context, we generally resolve ambiguities in favor of coverage․  Similarly, we generally interpret the coverage clauses of insurance policies broadly, protecting the objectively reasonable expectations of the insured․  These rules stem from the fact that the insurer typically drafts policy language, leaving the insured little or no meaningful opportunity to bargain for modifications․  Because the insurer writes the policy, it is held ‘responsible’ for ambiguous policy language, which is therefore construed in favor of coverage.”  (AIU, supra, 51 Cal.3d 807, 822, 274 Cal.Rptr. 820, 799 P.2d 1253.)   The court explained that “[a]lthough our focus is the expectations of the insured at the time the policy is made, this emphasis does not preclude coverage of forms of liability-such as those at issue here-created after the formation of the policy.   Because the policies in question here are ‘comprehensive,’ it was within the insured's reasonable expectation that new types of statutory liability would be covered, as long as they were within the ambit of the language used in the coverage provision․  The sole relevant inquiry in determining whether such types of liability are covered is whether, in view of the reasonable expectations of the insured, policy language can be interpreted to embrace the liability that may accrue under new statutory schemes.”  (51 Cal.3d 807, 822 fn. 8, 274 Cal.Rptr. 820, 799 P.2d 1253.) The court rejected arguments that the term “damages” should be interpreted in a technical and restrictive sense, stating “[i]n the absence of evidence that the parties, at the time they entered into the policies, intended the provisions at issue here to carry technical meanings, and implemented this intention by specially crafting policy language ․ we see little reason to depart from ordinary principles of interpretation.”   The court thus declined to interpret the policy language in a “technical or restrictive manner.”  (51 Cal.3d 807, 823, 274 Cal.Rptr. 820, 799 P.2d 1253.)

Since the term “damages” was not defined in the policy, the court looked “to its ‘ordinary and popular’ definition.”   After canvassing dictionary and other definitions of “damages,” the court adopted the broader meanings.   The court found that “the statutory and dictionary definitions of ‘damages' share several basic concepts.   Each requires there to be ‘compensation,’ in ‘money,’ ‘recovered’ by a party for ‘loss' or ‘detriment’ it has suffered through the acts of another.”  (AIU, supra, 51 Cal.3d 807, 826, 274 Cal.Rptr. 820, 799 P.2d 1253.)   The court observed that other courts had used “narrower technical meanings, focusing on the distinction between law and equity,” but declined to follow that technical approach “[f]or purposes of California law.”  (51 Cal.3d 807, 826, 274 Cal.Rptr. 820, 799 P.2d 1253.)   The court further noted that CERCLA and the HSAA “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 ․ 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․  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.”  (51 Cal.3d 807, 828, 274 Cal.Rptr. 820, 799 P.2d 1253.)

The court next moved to the core the issue of whether compelled reimbursement of government response costs constituted “damages.”   Based upon broad common definitions, and rejecting technical refinements, the court found such reimbursement to be “damages.”   For example, although the court recognized the distinction between “damages” and “restitution,” it stated that “[e]ven if recovery of response costs is technically ‘restitution’ rather than ‘damages,’ this fact is of little consequence to policy interpretation in the absence of evidence on the face of the policies that technical distinctions were intended.”  (AIU, supra, 51 Cal.3d 807, 834, 274 Cal.Rptr. 820, 799 P.2d 1253.)   The court additionally stated, “[w]hatever technical distinctions we and other courts have drawn between restitution and compensatory damages in other contexts, in ordinary terms both concepts are within the definition of ‘damages.’   For purposes of interpretation, this fact is dispositive.”  (51 Cal.3d 807, 836, 274 Cal.Rptr. 820, 799 P.2d 1253.)

The court then turned to the issue of costs of compliance with injunctions.   It first noted that the costs of injunctive relief “do not readily satisfy the statutory or dictionary definitions of ‘damages.’ ”   However, the court had just concluded that response costs are “damages.”  “It is unlikely,” continued the court, “․ 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․”  (AIU, supra, 51 Cal.3d 807, 838, 274 Cal.Rptr. 820, 799 P.2d 1253.)  “Moreover,” noted the court, “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․  [¶] 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 [between diminution in value versus cost to repair] is inapposite in the CERCLA context.”  (51 Cal.3d 807, 840, 274 Cal.Rptr. 820, 799 P.2d 1253.)  “Under CERCLA and similar statutes,” the court continued, “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․  [¶] ․ Because an insured would reasonably expect equal coverage of the costs of equivalent or alternative remedies, the costs of injunctive relief under the statutes in question here are ‘damages' for CGL purposes.”   (51 Cal.3d 807, 841-842, 274 Cal.Rptr. 820, 799 P.2d 1253.)

IV. The Determination and Order Issued to Foster-Gardner Commenced a “Suit” for CGL Purposes.

 Were this case presented on a clean slate, the proper resolution of the “suit” issue would be debatable.   The not-insubstantial nature of the insurers' arguments is demonstrated by their acceptance in many courts around the country.   In California, however, the application of a non-technical, “functional” approach to determine the “damages” issue in AIU lights the way to resolution of the “suit” issue.   There is no principled basis on which a non-technical, functional analysis could properly control the “damages” issue in AIU, while a strictly technical and literal analysis controlled the “suit” issue.   Neither the term “suit” nor the term “claim” is defined in the policies.   The terms must therefore be construed in favor of the insured, to the extent consistent with objectively reasonable expectations.   Although the proceedings commenced by the Determination and Order clearly do not constitute a traditional lawsuit in a court, neither do they constitute a mere claim which can simply be ignored-without adverse effect-until a traditional lawsuit is filed.   The true nature of HSAA “Superfund” proceedings lies somewhere between a traditional lawsuit in a court and a traditional claim or pre-suit demand which has no effect until enforced by a lawsuit in a court.  AIU teaches that ambiguities of this sort, produced by the combination of new schemes for remediating pollution plus undefined terms used in standard CGL policies, are to be construed against the insurer.

The cases reviewed above which applied the “literal meaning” approach to find that a proceeding such as that commenced by the Determination and Order issued to Foster-Gardner is not a “suit” generally gave little consideration to whether such proceedings can properly be characterized as only a “claim.”   Such proceedings can hardly be classified as merely a “claim” in light of their preclusive effect.   As noted by the cases applying the “functional” approach, the practical effects of such proceedings extend far beyond the effect of a traditional claim.   Those effects include at least some of the consequences which, at the time of the drafting of the CGL policies, could only be achieved by a lawsuit in a court.   Clearly, at the time of drafting, the policies were intended to protect against such effects. The primary illustration of this point is that the amount of damage liability will, as a practical matter, be conclusively determined before any lawsuit is filed in a court.   That amount will be the amount necessary to implement whatever remedial plan is selected by Cal-EPA.   This damage-preclusion effect will result unless the insured is successful in obtaining a writ of mandate by demonstrating a lack of substantial evidence in the administrative record supporting the remedial plan selected by Cal-EPA.   The creation of that administrative record is therefore a key part of the insured's defense.   The precise issue which is often the key issue in a lawsuit in court-the amount of damages-will effectively already be determined by the time a lawsuit in court is filed.   Yet protection and representation with respect to damage amounts is reasonably expected by an insured at the time of policy purchase.   Here, the law has simply transferred the determination of damages (normally accomplished by a lawsuit in court) from a lawsuit in court to a pre-lawsuit proceeding.   Certain defenses may also be foreclosed if not raised during the administrative proceedings, and allocation of several liability may occur as well.

 AIU instructs that the objective of the law is to protect the reasonable expectations of an insured.   Normally an insured can reasonably expect to be defended as damages are determined.  AIU (and the cases which have applied a functional approach to the “suit” versus “claim” issue) supports the conclusion that the proceedings commenced by the Determination and Order issued to Foster-Gardner are within the meaning of the term “suit” as used in a CGL policy.   Additionally, other jurisdictions which have found environmental remediation and response costs to constitute “damages” (just as the California Supreme Court found in AIU ) almost invariably also find pre-lawsuit proceedings setting the amount of damages to be within the meaning of the term “suit.” ¹⁷  (Cf. Spangler Const. v. Indus. Crankshaft (1990) 326 N.C. 133, 388 S.E.2d 557, 570 [“Our research has uncovered no decisions where environmental cleanup expenses were deemed ‘damages because of property damage,’ but where the administrative orders requiring cleanup were not deemed ‘suits.’ ”].) A different conclusion would create a discordant process in which the “damages” covered by a CGL policy would be determined in a proceeding not covered by the CGL policy.  (Cf. Higgins Industries Inc. v. Fireman's Fund Ins. Co. (E.D.Mich.1989) 730 F.Supp. 774, 776, fn. 1 [“suit” and “damages” issues “are inextricable aspects of the same problem”].) Since it is objectively reasonable for an insured to expect, on the CGL wording involved here, that a proceeding which fixes the damages covered by the CGL policy is within the scope of the duty to defend provided by that same policy, Foster-Gardner was entitled to summary adjudication that the insurers had a duty to defend.

V.-VI.**

VII. Disposition.

The trial court's denial of Foster-Gardner's motion for summary adjudication as to duty to defend is reversed with directions to enter summary adjudication in favor of Foster-Gardner.   The denial of Foster-Gardner's motion for summary judgment as to past defense costs is affirmed, without prejudice to a renewed and properly supported motion.   The trial court's order granting summary judgment to the insurers on the grounds of the pollution exclusion is reversed, without prejudice to a renewed and properly supported motion.   Each side to bear its own costs on appeal.

BOREN, P.J., and NOTT, J., concur.

FOOTNOTES

1.   Comprehensive General Liability or Commercial General Liability.

2.   The Carpenter-Presley-Tanner Hazardous Substance Account Act, Health and Safety Code § 25300 et seq.All statutory references are to the Health and Safety Code unless otherwise specified.

3.   The carriers are National Union Fire Insurance Company of Pittsburgh, PA;  Fremont Indemnity Company;  Pacific Indemnity Company;  and Ranger Insurance Company.

4.   See, generally, Robie et al.   California Civil Practice, Environmental Litigation, Chapter 3, Part I.B., California “Superfund” Litigation, and Chapter 7, Part VI., Regulatory Proceedings Pursuant to Hazardous Substance Account Act (Bancroft-Whitney).   Although the HSAA is not identical to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), as amended by the Superfund Amendments and Reauthorization Act, 42 U.S.C. sections 9601 et seq., it incorporates many CERCLA concepts.   No distinction between HSAA and CERCLA pertinent to proper interpretation of the term “suit” in a CGL policy has been cited.   Cases involving both CERCLA and state “Superfund” programs similar to the HSAA are relied on by both sides and are considered in this opinion.   However, since only the HSAA is directly involved in this case, only the HSAA is summarized here.

5.   Available defenses in HSAA “Superfund” proceedings are the same as those available in CERCLA proceedings.   Generally these defenses are acts of God, war, or acts of a third party, and the innocent landowner defense. (§ 25323.5(b).)

6.   See generally, Robie et al., California Civil Practice, Environmental Litigation, Chapter 7, Regulatory Proceedings, Part VI. B. 2, Removal and Remediation Actions.

7.   In addition to published appellate cases, there are numerous Federal District court opinions on this issue, also deciding it in both directions.  (See, e.g., Fireman's Fund Ins. Companies v. Ex-Cell-O Corp. (E.D.Mich.1987) 662 F.Supp. 71 [“suit” includes any effort to impose on policyholders a liability ultimately enforceable by a court];  Hutchinson Oil Co. v. Federated Service Ins. Co. (D.Wyo.1994) 851 F.Supp. 1546 [EPA administrative claim triggered duty to defend];  Morrisville Water & Light Dept. v. USF&G (D.Vt.1991) 775 F.Supp. 718 [EPA letter sufficiently coercive to constitute “suit” under CGL policy];  Arco v. Travelers Ins. Co. (W.D.Mich.1989) 730 F.Supp. 59 [potentially responsible party letter is not a suit];  Becker Metals Corp. v. Transportation Ins. Co. (E.D.Mo.1992) 802 F.Supp. 235 [EPA enforcement action is not a “suit”];  Harleysville Mut. Ins. v. Sussex County, Del. (D.Del.1993) 831 F.Supp. 1111 [potentially responsible party letter not a “suit”].)

8.   “Potentially Responsible Party.”

9.   The technical legal distinctions cited by the City of Edgerton majority between damages and equitable relief, costs imposed to remediate pollution and prevent future harm versus damages imposed to compensate for harm already inflicted, etc., are traditional and well-established.   The City of Edgerton majority's citation to these distinctions is consistent with their traditional definition of the term “suit.”   The California Supreme Court, however, has found such technical legal distinctions inapplicable to the question of whether environmental response costs are “damages” under California law.   Rather than applying technical legal distinctions, the California Supreme Court adopted a functional approach when it found that such costs are “damages” within the meaning of CGL policies.  (AIU, supra, 51 Cal.3d 807, 274 Cal.Rptr. 820, 799 P.2d 1253.)  AIU, and its ramifications for the instant case, is discussed in more detail below.

10.   Except to the extent interpreted as a comment upon the objectively reasonable expectations of an insured, this ground for finding a duty to defend must be disregarded in California.   The issue in California is proper interpretation of the language of a private insurance contract.   A California court cannot properly declare that a private contract obligates a party to carry out a public policy simply because that policy is considered laudable by the court.  (Cf. AIU, supra, 51 Cal.3d 807, 818, 274 Cal.Rptr. 820, 799 P.2d 1253 [“The answer is to be found solely in the language of the policies, not in public policy considerations.”].)

11.   To the extent that this fifth reason is again a call for judicial imposition of judicially-favored policies, rather than a commentary on the reasonable expectations of an insured in light of how modern statutes are structured, it has no application in California.

12.   Although some of the cases relied upon by Lapham involved CGL rather than “all risks” policies, the Illinois Supreme Court found them relevant since they contained the same “suit” and “claim” language.

13.   The Maine Supreme Court thus unanimously decided the “damages” issue exactly the opposite of the unanimous California Supreme Court in AIU.

14.   States which conclude that environmental response costs are not “damages” necessarily also conclude that the pre-lawsuit proceedings which impose such costs are not a “suit,” since CGL policies cover only “suits” which seek “damages.”   States which decide that environmental response costs are “damages,” as has California, theoretically leave open the question of whether the pre-lawsuit proceedings which impose the damages are, or are not, a “suit.”   However, only one state appears to have ruled that response costs are “damages” but that the pre-lawsuit proceedings which impose response costs are not a “suit.”  (See Outboard Marine v. Liberty Mut. Ins. (1992) 154 Ill.2d 90, 180 Ill.Dec. 691, 703, 607 N.E.2d 1204, 1216 [environmental action seeking equitable relief seeks “damages”];  Lapham-Hickey, supra, 166 Ill.2d 520, 211 Ill.Dec. 459, 463, 655 N.E.2d 842, 847 [not a “suit”].)

15.   In making these determinations, the Massachusetts Supreme Court distinguished a letter from the Massachusetts Department of Environmental Quality Engineering advising Hazen that there was a threat of future contamination from certain “over-packed drums” on the site, and demanding that action be taken to prevent pollution from this source.   This letter, concluded the Massachusetts Supreme Court, did not commence a “suit,” and the cost of responding to it did not constitute “damages.”   The EPA letter, by contrast, dealt with pollution which had already occurred, and demanded remediation.

16.   The Resource Conservation and Recovery Act of 1976, 42 U.S.C. § 6928 (1988).

17.   See Ante, footnote 14.

FOOTNOTE.   See footnote *, ante.

ZEBROWSKI, Associate Justice.