FRONTIER OIL CORPORATION v. RLI INSURANCE COMPANY

Filed 8/6/07

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION THREE

Appeal from a judgment of the Superior Court of Los Angeles County, Richard L. Fruin, Judge. Reversed.

Dickstein Shapiro Morin & Oshinsky, Kirk A. Pasich, Clyde M. Hettrick and Daniel H. Rylaarsdam for Plaintiffs and Appellants.

Morison-Knox Holden & Prough, William C. Morison, Michael D. Prough and Richard A. Eggerth for Defendant and Respondent.

_______________________________________

Frontier Oil Corporation (Frontier) and its wholly-owned subsidiary, Wainoco Oil & Gas Company (Wainoco), appeal a summary judgment in favor of RLI Insurance Company (RLI). Frontier and Wainoco contend RLI has a duty to defend them in several personal injury actions arising from the operation of an oil and gas production facility adjacent to Beverly Hills High School in Beverly Hills, California. Frontiers predecessor and RLIs predecessor had entered into a liability insurance policy in Texas. The parties dispute whether RLI agreed under the terms of the policy to defend pollution claims and whether a duty to defend the underlying actions has arisen. Each of these questions presents a choice-of-law issue concerning the law governing our determination. Each choice-of-law issue in turn presents the threshold question of the applicable choice-of-law rule.

We conclude that notwithstanding the application of the governmental interest analysis to other choice-of-law issues, Civil Code section 1646 is the choice-of-law rule that determines the law governing the interpretation of a contract. Section 1646 states that a contract is to be interpreted according to the law and usage of the place it is to be performed if the contract indicate[s] a place of performance and according to the law and usage of the place it was made if the contract does not indicate a place of performance.[1] A contract indicate[s] a place of performance within the meaning of section 1646 if the contract expressly specifies a place of performance or if the intended place of performance can be gleaned from the nature of the contract and its surrounding circumstances. California, as the location of the risk insured under the policy, was the state where RLI would be obligated to perform its defense obligations under the policy, and the contracting parties knew this at the time the policy was issued. Indeed, the policy included several endorsements reflecting the existence of a covered risk located in California. The law of California therefore governs the interpretation of the policy. Interpreting the policy under California law, we will hold that it includes a contractual duty to defend and that the facts alleged in the underlying complaints were sufficient to create a potential for coverage giving rise to a duty to defend. We will therefore reverse the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

1. The Insurance Policy

Underwriters Indemnity Company, RLIs predecessor in interest, issued a commercial general liability insurance policy to Wainoco Oil Corporation, Frontiers predecessor in interest, in January 1988. Wainoco Oil Corporation, acting through an insurance brokerage, and Underwriters Indemnity Company entered into the insurance contract in Texas. The policy was effective from October 1, 1987, to October 1, 1988.

The policys liability insuring clause states: We will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies. . . .  The bodily injury or property damage must be caused by an occurrence . . . .  We will have the right and duty to defend any suit seeking those damages. (Italics added.) Exclusion f, in the same coverage form, provided for an absolute pollution exclusion: This insurance does not apply to: [] . . . [] . . . Bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants . . . .

The policy includes several contemporaneously issued endorsements, including one entitled Oil and Gas Lease Operators Pollution Liability Coverage (the pollution liability endorsement), which states at the top of its first page, This endorsement forms a part of the policy to which attached, effective on the inception date of the policy unless otherwise stated herein. The pollution liability endorsement deletes exclusion f from the policy and states: We will pay those sums that the insured becomes legally obligated to pay as compensatory damages because of bodily injury or property damage to which this insurance applies, caused by a pollution incident. The endorsement defines pollution incident as the sudden and accidental emission, discharge, release or escape of pollutants into or upon land or the atmosphere, provided that such emission, discharge, release or escape emanates from operations conducted on land and results in environmental damage.[2] Environmental damage is defined as the injurious presence in or upon land or the atmosphere of solid, liquid, gaseous or thermal contaminants, irritants or pollutants. The endorsement, however, does not mention a duty to defend.

The policy also includes three additional endorsements relating specifically to the oil and gas operations in Beverly Hills, California. One adds the City of Beverly Hills as an additional insured (with respect to claims arising out of the following project: Oil and Gas Operations at 9865 Olympic Blvd., City of Beverly Hill[s], CA), apparently as a public entity that had issued a permit to conduct oil and gas operations at the site; the second adds the Department of Transportation of the City of Los Angeles as an additional insured, also apparently as a public entity that had issued a permit; and the third is a Waiver of Transfer Rights of Recovery Against Others made out in favor of the City of Beverly Hills with respect to claims arising from the same project.

Finally, an endorsement for certain Texas Changes apparently conforms this policy issued in Texas with Texas law with respect to three specific areas, none of which is relevant to the issues raised in this appeal: (1) the notice prejudice rule, (2) policy cancellation, and (3) policy renewal. That endorsement also states that the insured may complain to the Texas State Board of Insurance if any dispute concerning the premium or a claim is not resolved.

2. Underlying Actions and Tender of Defense

Lori Lynn Moss and numerous other plaintiffs filed a complaint against Frontier, Wainoco, and other oil and gas industry defendants in June 2003 (Moss v. Venoco, Inc. (Super. Ct. L.A. County, No. BC297083)). The plaintiffs alleged that the defendants oil and gas operations at Drill-Site #1 and other locations at the Beverly Hills site caused releases of toxic chemicals into the environment resulting in personal injuries and deaths. Other plaintiffs filed similar complaints against Frontier, Wainoco, and others alleging the same operative facts in six additional actions filed from July 2003 to May 2005. Frontier and Wainoco tendered defense of all of these actions to several primary liability insurers, including RLI. RLI responded that it would investigate the matter.

In January 2004, Frontier and Wainoco made a written demand on numerous insurers, including RLI, to provide a defense in the underlying actions. On February 12, 2004, RLI filed a complaint in the United States District Court for the Southern District of Texas seeking a declaratory judgment that it had no duty to defend or indemnify Frontier or Wainoco in the underlying actions (RLI Insurance Co. v. Wainoco Oil & Gas Co. (S.D. Tex., No. H-04-0553)). RLI sent a letter to Frontier and Wainoco the next day denying coverage and a defense.

3. Trial Court Proceedings

Frontier and Wainoco filed their complaint in this action against RLI and other insurers in February 2004, alleging counts for (1) declaratory relief, (2) breach of contract, and (3) breach of the implied covenant of good faith and fair dealing, all relating to the insurers refusal to defend the underlying actions. The Texas federal district court stayed RLIs declaratory relief action in April 2004 under its broad discretionary authority to abstain from ruling on a declaratory relief action where there is a pending state court action in which the matters in controversy might be fully resolved. Frontier and Wainoco later resolved this action with respect to all of the insurer defendants except RLI.

RLI moved for summary judgment against Frontier in November 2005, arguing that it had no duty to defend Frontier in the underlying actions. RLI argued that Texas law governed the dispute pursuant to Civil Code section 1646 and Code of Civil Procedure section 1857 and that under Texas law, RLI had no duty to indemnify or defend Frontier. Specifically, RLI argued that under Texas law (1) the pollution liability endorsement does not promise a defense of pollution claims, so the policy provides for indemnity of pollution claims but not a defense; and, in any event (2) the allegations in the underlying complaints do not create a potential for coverage. RLI moved for summary judgment against Wainoco on the same grounds, and also argued that Wainoco was entitled to no relief because it was not a named insured under the policy.

The trial court concluded that Civil Code section 1646 determined whether the law of California or Texas governed the dispute.[3] Noting the Texas Changes endorsement, the court stated, The insurance policy as a whole shows the intent of the parties at the time the insurance contract was made was that Texas law would apply to any disputes arising out of the contract. The court concluded, the insurance contract was made and accepted between a Texas insurer and a Texas‑based insured in Texas and was to be performed under Texas law. The court therefore held that Texas law governed this dispute. The court acknowledged that [t]he major risk identified by the parties in their contract was the insureds petroleum drilling operation in California, but stated that such circumstance alone did not compel the conclusion that California law governed.

The trial court concluded that, under Texas law, the policy did not include a duty to defend pollution claims because the pollution liability endorsement did not expressly promise a defense. The court therefore held that RLI had no duty to defend Frontier or Wainoco regardless of the allegations in the underlying actions. The court granted the summary judgment motions against both Frontier and Wainoco and entered a judgment in favor of RLI. Frontier and Wainoco filed a timely appeal.

CONTENTIONS

Frontier and Wainoco contend (1) the governmental interest analysis is the choice-of-law rule that determines whether California law or Texas law governs the parties rights under the policy, and under that analysis California law applies; (2) even under Civil Code section 1646 and Code of Civil Procedure section 1857, the contemplated place of performance was California, so California law applies; (3) interpreted in accordance with California law, the policy includes a contractual duty to defend that extends to claims arising from pollution incidents; (4) the allegations of the third party complaints establish a potential for coverage under the policy and therefore create a duty to defend; and (5) RLI has a duty to defend under Texas law, even if it applies.

RLI disputes these contentions and argues that (1) Civil Code section 1646 and Code of Civil Procedure section 1857 establish the choice-of-law rule that determines whether California law or Texas law governs the interpretation of the policy and, under that analysis, Texas law applies because the policy does not expressly specify a place of performance and the contract was made in Texas; (2) even under the governmental interest analysis, Texas law applies; (3) interpreted in accordance with Texas law, the policy does not include a duty to defend pollution claims; (4) the allegations of the third party complaints do not establish a potential for coverage under the policy and therefore cannot support a duty to defend under Texas law; (5) if California law applies, the matter should be remanded to the superior court to consider extrinsic evidence that was not considered in ruling on the prior summary judgment motion; and (6) Wainoco is not an insured under the policy, so the judgment should be affirmed as to Wainoco.

DISCUSSION

1. Standard of Review

A party is entitled to summary judgment only if there is no triable issue of material fact and the party is entitled to judgment as a matter of law. (Code Civ. Proc.,  437c, subd. (c).) A defendant moving for summary judgment must show that one or more elements of the plaintiffs cause of action cannot be established or that there is a complete defense. (Id., subd. (p)(2).) A defendant can satisfy its burden by presenting evidence that negates an element of the cause of action or evidence that the plaintiff cannot reasonably obtain needed evidence. (Kahn v. East SideUnionHigh School Dist. (2003) 31 Cal.4th 990, 1003.) If the defendant meets this burden, the burden shifts to the plaintiff to set forth specific facts showing that a triable issue of material fact exists. (Code Civ. Proc.,  437c, subd. (p)(2).) We review the trial courts ruling de novo, liberally construe the evidence in favor of the opposing party, and resolve all doubts concerning the evidence in favor of the opposing party. (Miller v. Department of Corrections (2005) 36 Cal.4th 446, 460.)

2. Choice-of-Law Doctrine

Choice of law refers to the determination of which states or other jurisdictions law applies to a particular issue. Choice of law is one branch of the larger doctrine of conflicts of laws, which also includes the questions in which jurisdiction a suit can be brought and the effect of a foreign judgment. (See Weintraub, Commentary on the Conflict of Laws (5th ed. 2006) 1.1, p. 1; Rest.2d Conflict of Laws,  2, com. a, pp. 2‑3.) Choice-of-law rules can be statutory or based on common law. (See Rest.2d Conflict of Laws,  5, coms. b, c, p. 9; Leflar, Choice-of-Law Statutes (1977) 44 Tenn. L.Rev. 951.) Courts and commentators have long struggled with differing approaches to challenging choice-of-law problems.

The determination whether RLI has a duty to defend under the policy presents two principal issues. The first is whether the policy includes a duty to defend pollution claims. This is a question of contract interpretation. The second is whether the underlying personal injury actions trigger the duty to defend. Each of these questions presents a choice-of-law issue as to whether the law of California or another state governs. Each choice-of-law issue in turn presents the threshold question of which choice-of-law rule properly applies.

We first will decide that Civil Code section 1646 is the choice-of-law rule that determines the law governing the interpretation of the policy. We then will apply section 1646, conclude that California law governs, and interpret the policy under California law. Such interpretation will require us to conclude that the policy includes a duty to defend pollution claims. Next, we will consider the choice of law with respect to whether the underlying actions trigger the duty to defend. We will hold that California law governs under either section 1646 or the governmental interest analysis. Applying California law, we will conclude that RLI has a duty to defend Frontier and Wainoco in the underlying actions.

3. Civil Code Section 1646 Is Californias Choice-of-Law Rule that
Determines the Law Governing the Interpretation of a Contract

Civil Code section 1646 (see fn. 1, ante)[4] was first enacted in 1872 based on an identical provision in the Field Code (Fields Draft N.Y. Civ. Code (1865) 811) and remains unchanged today. Published opinions by California courts have applied the statute as a choice-of-law rule determining the law governing the interpretation of a contract very infrequently, and those opinions (discussed post) provide little guidance as to the meaning of the critical phrase indicate a place of performance (Civ. Code,  1646).

Our fundamental task in construing a statute is to ascertain the legislative intent so as to effectuate the purpose of the law. (Hassan v. MercyAmericanRiverHospital(2003) 31 Cal.4th 709, 715.) Because the statutory language ordinarily is the most reliable indicator of legislative intent, we begin by examining the words of the statute. (Ibid.) We give the words of the statute their ordinary and usual meaning and construe them in the context of the statute as a whole and the entire scheme of law of which it is a part. (State Farm Mutual Automobile Ins. Co. v. Garamendi (2004) 32 Cal.4th 1029, 1043.) If the language is clear and a literal construction would not result in absurd consequences that the Legislature did not intend, we presume that the Legislature meant what it said and the plain meaning governs. (Coalition of Concerned Communities, Inc. v. City of Los Angeles(2004) 34 Cal.4th 733, 737.) If the language is ambiguous, we may consider a variety of extrinsic aids, including the purpose of the statute, legislative history, and public policy. (Ibid.)

Civil Code section 1646, by its express terms, prescribes a choice-of-law rule concerning the interpretation of contracts. It states that a contract is to be interpreted according to the law and usage of the place where it is to be performed, but only if the contract indicate[s] a place of performance, and is to be interpreted according to the law and usage of the place where it was made if the contract does not indicate a place of performance.[5] Frontier and Wainoco construe the quoted language to mean that a contract must be interpreted according to the law of the place where it is to be performed if the contract contemplates performance in a particular place, while RLI construes the same language to mean that the law of the place where the contract is to be performed governs only if the contract expressly specifies a place of performance.

The apparent purpose of Civil Code section 1646 is to determine the choice of law with respect to the interpretation of a contract in accordance with the parties presumed intention at the time they entered into the contract. This was the explanation given by courts and commentators for the former common law rule on which section 1646 apparently was based. Judge Joseph Story, in his highly regarded treatise on conflict of laws, described an exception to the general rule that the law of the place of making governed the validity and interpretation of a contract: [W]here the contract is, either expressly or tacitly, to be performed in any other place, there the general rule is in conformity to the presumed intention of the parties that the contract as to its validity, nature, obligation, and interpretation is to be governed by the law of the place of performance. (Story, Conflict of Laws (7th ed. 1872) 280, p. 325.) Similarly, Kents Commentaries explained that the law of the place a contract is to be performed should govern because, The rights of the parties are to be judged of by that law by which they intended, or rather by which they may justly be presumed to have bound themselves. [Citations.].[6] (2 Kent, Commentaries on American Law (12th ed. 1873) p. 622 (459) fn. 1.) Numerous contemporary judicial opinions followed this rule based on the parties presumed intention. (See e.g., Vanzant, Jones & Co. v. Arnold, Hamilton & Johnson (1860) 31 Ga. 210; McDaniel v. Chicago & Northwestern R. Co. (1868) 24 Iowa 412, Dyke v. Erie R. Co. (1871) 45 N.Y. 113, 116-117; First Nat. Bank of Waverly v. Hall (1892) 150 Pa. 466, 472-473.)

In our view, Civil Code section 1646 was intended to give effect to the parties presumed intention that the law of the place a contract is to be performed should govern its interpretation.[7] The parties intention as to the place of performance sometimes can be gleaned from the nature of the contract and the surrounding circumstances, even if the contract does not expressly specify a place of performance. This was Storys view. (Story, Conflict of Laws, supra, 280, p. 325 [where the contract is, either expressly or tacitly, to be performed in any other place, . . . (italics added)]; see also Pomeroy v. Ainsworth (N.Y. Sup. 1856) 22 Barb. 118, 128 [If no place of performance is expressly stated, or implied from the terms of the contract, the law of the place where it was made will govern (italics added)].)[8] Moreover, the use of the word indicate in section 1646 in lieu of a more restrictive word such as specify or state suggests that the Legislature intended a less restrictive meaning. Accordingly, we conclude that a contract indicate[s] a place of performance within the meaning of section 1646 if the intended place of performance can be gleaned from the nature of the contract and its surrounding circumstances. The intended place of performance is a question of contract interpretation for the court to decide, except to the extent the answer may depend on the credibility of extrinsic evidence. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865; American Alternative Ins. Corp. v. Superior Court (2006) 135 Cal.App.4th 1239, 1245.)

Story Continues as Part II

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[1]Civil Code section 1646 provides: A contract is to be interpreted according to the law and usage of the place where it is to be performed; or, if it does not indicate a place of performance, according to the law and usage of the place where it is made.

[2] The effect of this endorsement was to remove the absolute pollution exclusion from the original policy and provide in its place a limited promise of coverage for claims arising from any sudden and accidental emission, discharge, release or escape of pollutants.

[3] The trial court also apparently relied on Code of Civil Procedure section 1857 (see fn. 4, post).

[4] Code of Civil Procedure section 1857 states, in terms somewhat similar to Civil Code section 1646: The language of a writing is to be interpreted according to the meaning it bears in the place of its execution, unless the parties have reference to a different place. In light of our conclusion that Civil Code section 1646 determines the law governing the interpretation of a contract and the apparent similarities between the two statutes, we need not decide whether Code of Civil Procedure section 1857 also states a choice-of-law rule or only an interpretive rule concerning usage.

[5] Civil Code section 1646 prescribes both a choice-of-law rule concerning the interpretation of contracts and a rule of interpretation regarding word usage. The California Supreme Court has cited section 1646 in several opinions to support the admissibility of evidence of usage for the purpose of interpreting a contract. (Callahan v. Stanley (1881) 57 Cal. 476, 479; Burns v. Sennett & Miller (1893) 99 Cal. 363, 371‑372; Law v. Northern Assurance Co. (1913) 165 Cal. 394, 407; Alta Planing Mill Co. v. Garland (1914) 167 Cal. 179, 183; Buckner v. Leon & Co. (1928) 204 Cal. 225, 227; Alamitos Land Co. v. Shell Oil Co. (1935) 3 Cal.2d 396, 404; Ermolieff v. R.K.O. Radio Pictures (1942) 19 Cal.2d 543, 550; Beneficial Fire & Cas. Ins. Co. v. Kurt Hitke & Co. (1956) 46 Cal.2d 517, 525-526.) Those opinions typically cited section 1646 together with other statutes stating that the words of a contract or writing are to be interpreted in accordance with any special meaning intended by the parties (e.g., Civ. Code,  1644, 1645; Code Civ. Proc.,  1861), and did not discuss the meaning of indicate a place of performance in section 1646. The California Supreme Court has never cited section 1646 as a choice-of-law rule.

[6] The former common law rule described by these commentators was not limited to the choice-of-law issue of contract interpretation, as is Civil Code section 1646.

[7] If the parties state their intention in an express choice-of-law clause, California courts ordinarily will enforce the parties stated intention unless (1) the chosen state has no substantial relationship to the parties or their transaction, and there is no other reasonable basis for the parties choice, or (2) the chosen states law is contrary to a fundamental policy of the state whose law otherwise would apply, and the latter state has a materially greater interest in the matter than does the chosen state. (Nedlloyd Lines B. V. v. Superior Court (1992) 3 Cal.4th 459, 464-466 & fns. 5 & 6.)

[8] Both of these authorities were among the references cited in the notes to section 811 of the Fields Draft New York Civil Code, which was the source for the identical language in Civil Code section 1646.