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

Story Continued from Part II .

Stonewall Surplus Lines Ins. Co. v. Johnson Controls, Inc. (1993) 14 Cal.App.4th 637 (Stonewall) was a declaratory relief action by excess liability insurers against their insured. The trial court concluded that the insurers were not required to indemnify the insured for a punitive damages award because California law, for reasons of public policy, prohibits indemnity for punitive damages. (Id. at pp. 640-641.) The question on appeal was whether the insurers could be required to indemnify the insured for punitive damages. Applying the governmental interest analysis, the Court of Appeal concluded that the laws of California and Wisconsin differed on that question and that California had a greater interest in applying its own laws to the dispute. (Id. at pp. 645, 649.) In deciding that California law governed, Stonewall placed particular importance on the location of the insured risk.[1] (Id. at pp. 646‑647, citing Rest.2d Conflict of Laws,  193 & com. f.) The choice-of-law issue concerned the existence of a right of indemnity for punitive damages and did not involve an issue of contract interpretation.

6. The Intended Place of Performance of a Liability Insurance
Policy Is the Place of the Insured Risk

The liability insurance policy at issue in this case includes both indemnity and defense obligations. An indemnity obligation entails the payment of money in order to resolve liability. [Citations.] (Buss v. Superior Court (1997) 16 Cal.4th 35, 46 (Buss).) A defense obligation, in contrast, entails the rendering of a service, viz., the mounting and funding of a defense [citations]. (Ibid.) An insurer performs its defense obligation by providing defense services through an attorney. If the insured risk involves operations at one or more fixed locations, as here, a third party complaint against the insured arising from those operations typically is prosecuted in the jurisdiction where the operations are located. The insurer provides defense services in the jurisdiction where the suit is prosecuted. There is little doubt that this was the understanding of the parties at the time they entered into the insurance contract in this case.

The policy provides general liability coverage and specifically refers to claims arising from oil and gas operations at Drill-Site #1 in Beverly Hills, California. Two policy endorsements name the City of Beverly Hills and the Department of Transportation of the City of Los Angeles as additional insureds with respect to claims arising out of . . . [] Oil or Gas Operations in the City of Beverly Hills, California. In another endorsement, RLI waives its right of recovery against the City of Beverly Hills for certain payments made under the policy with respect to the same specified claims. These three endorsements clearly demonstrate that the parties intended the policy to provide coverage for the insureds oil and gas operations in Beverly Hills. Accordingly, we conclude that the parties anticipated that a suit arising from those operations in Beverly Hills could be prosecuted in California and that RLI would be obligated to provide a defense in California if the claims were potentially covered under the policy.

We therefore conclude that California was the intended place of performance of the contract with respect to those claims, that the policy thus indicate[s] a place of performance within the meaning of Civil Code section 1646 with respect to such claims, and that California law governs the interpretation of the policy. Accordingly, we have no need to apply a governmental interest analysis or give consideration to Texas law with respect to the interpretation of the policy.

7. Interpreted Under California Law, the RLI Policy Includes a Duty to
Defend Pollution Claims Arising from Sudden and Accidental Releases

We interpret an insurance policy under California law using the same rules of interpretation applicable to other contracts. (Palmer v. Truck Ins. Exchange (1999) 21 Cal.4th 1109, 1115.) The mutual intention of the contracting parties at the time the contract was formed governs. (Civ. Code,  1636; Palmer, supra, at p. 1115.) We ascertain that intention solely from the written contract if possible, but also consider the circumstances under which the contract was made and the matter to which it relates. (Civ. Code,  1639, 1647.) We consider the contract as a whole and interpret the language in context, rather than interpret a provision in isolation. (Id.,  1641.) We interpret words in accordance with their ordinary and popular sense, unless the words are used in a technical sense or a special meaning is given to them by usage. (Id.,  1644.) If contractual language is clear and explicit and does not involve an absurdity, the plain meaning governs. (Id.,  1638.) (American Alternative Ins. Corp. v. Superior Court, supra, 135 Cal.App.4th at p. 1245.)

We interpret an insuring clause broadly consistent with the reasonable expectations of the insured. (MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635, 648; AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 822.) An exclusion from coverage otherwise within the scope of an insuring clause must be clear and unmistakable to be given effect. (MacKinnon, supra, at p. 648.)  The exclusionary clause must be conspicuous, plain and clear. [Citation.]   (Ibid.) An exception to an exclusion is treated in the same manner as a coverage provision and therefore is interpreted broadly consistent with the insureds reasonable expectations. (TRB Investments, Inc. v. Firemans Fund Ins. Co. (2006) 40 Cal.4th 19, 27-28.)

An endorsement modifies the basic insuring forms of the policy and is an integral part of the policy.[2] (Adams v. Explorer Ins. Co. (2003) 107 Cal.App.4th 438, 450-451.) Standing alone, an endorsement means nothing. Endorsements on an insurance policy form a part of the insurance contract [citation], and the policy of insurance with the endorsements and riders thereon must be construed together as a whole [citation].  (Id. at p. 451.) An endorsement can expand or restrict the coverage otherwise provided by the policy. If there is any conflict between an endorsement and the body of a policy, the endorsement controls, provided that any reduction in coverage reasonably expected under the body of a policy must be  conspicuous, plain and clear.  (Haynes v. Farmers Ins. Exchange (2004) 32 Cal.4th 1198, 1208.)

The policy here expressly promises both indemnity and a defense. The insuring clause in the commercial general liability coverage form provides coverage for sums that the insured becomes legally obligated to pay as damages because of bodily injury or property damage caused by an occurrence,  and states that RLI has the right and duty to defend any suit seeking those damages. Exclusion f in the same coverage form states that the insurance does not apply to bodily injury or property damage caused by the actual or threatened release of pollutants at premises owned, occupied, or used by the insured. The pollution liability endorsement deletes exclusion f and provides coverage for sums that the insured becomes legally obligated to pay as damages because of bodily injury or property damage caused by a pollution incident.  The endorsement does not mention the duty to defend, does not clearly and unmistakably exclude pollution claims from the duty to defend stated in the body of the policy, and therefore does not exclude pollution claims from the contractual duty to defend.

The insuring clause in the pollution endorsement provides coverage for damages arising from a pollution incident,  which is defined in relevant part as a sudden and accidental release resulting in environmental damage. California courts interpret the phrase sudden and accidental when used in this context to mean abrupt in time, unexpected, and unintended. (Shell Oil Co. v. Winterthur Swiss Ins. Co. (1993) 12 Cal.App.4th 715, 755.)

Interpreting the policy under California law, we conclude that RLI promised to defend claims for damages arising from pollution incidents with respect to the oil and gas operations in Beverly Hills notwithstanding that the pollution liability endorsement does not mention a duty to defend.

8. The Allegations of the Third Party Complaints Create a Duty to Defend

a. The Applicable Choice-of-Law Rule

The fundamental principles under California law regarding whether a duty to defend arises were established in Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263 (Gray). Gray rejected the argument that an insurer had a duty to defend under the policy only if the insured was entitled to indemnity, and held that the duty to defend was independent of and broader than the duty to indemnify. (Id. at pp. 274-275.) Gray stated that uncertainties concerning policy interpretation must be resolved in favor of the reasonable expectations of the insured, and that in light of the policy language, the insured reasonably would expect the insurer to defend a suit involving a loss of the nature and kind covered by the policy. (Ibid.) Gray therefore concluded that an insurer must defend a suit that potentially seeks damages covered by the policy. (Id. at p. 275.)

Gray seemed to state that these conclusions reflected the courts interpretation of policy provisions, as distinguished from a rule of law imposed on the parties for public policy reasons regardless of their intentions upon entering into the insurance contract. (Gray, supra, 65 Cal.2d at p. 274.)[3] This suggests that the fundamental principals discussed above regarding whether a duty to defend arises are rules of law regarding policy interpretation and that Civil Code section 1646 determines the appropriate choice of law governing these issues. On the other hand, it was not necessary for the court in Gray to decide whether these rules of law were rules of policy interpretation for purposes of section 1646; these rules could be characterized as public policy choices that do not necessarily reflect the actual or presumed intention of the parties. Moreover, Gray stated further that the duty to defend arises whenever the insurer ascertains facts that create a potential for liability under the policy, whether the insurer learns those facts from the complaint, the insured, or other sources, and did not explain that conclusion as a question of policy interpretation or refer to the reasonable expectations of the insured. (Gray, supra, at pp. 276‑277.)[4] We need not decide whether these or other rules regarding the duty to defend are rules of policy interpretation for purposes of section 1646 because our conclusion under either section 1646 or the governmental interest analysis is that California law governs, as we will explain.[5]

b. The Applicable Rules of Law of California and Texas Do Not

Materially Differ

The first step in the governmental interest analysis is to determine whether the applicable rules of law of the potentially concerned jurisdictions materially differ. (Washington Mutual, supra, 24 Cal.4th at p. 919.) If there is no material difference, there is no choice-of-law problem and the court may proceed to apply California law. (See id. at p. 920.) The party arguing that foreign law governs has the burden to identify the applicable foreign law, show that it materially differs from California law, and show that the foreign law furthers an interest of the foreign state. (Id. at p. 919; Bernhard, supra, 16 Cal.3d at pp. 317‑318.)

A liability insurer has a duty to defend its insured under California law if facts alleged in the complaint, or other facts known to the insurer, potentially could give rise to coverage under the policy. (Scottsdale Ins Co. v. MV Transportation (2005) 36 Cal.4th 643, 654-655 (Scottsdale); Gray, supra, at 65 Cal.2d pp. 275‑277.) The facts need only raise the possibility that the insured will be held liable for covered damages. (Montrose, supra, 6 Cal.4th at p. 304.) An insurer has a duty to defend even if the claims against the insured are  groundless, false, or fraudulent.  (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 19.) Any doubt as to whether the facts establish the existence of the defense duty must be resolved in the insureds favor. (Montrose, supra, at pp. 299-300.)

A duty to defend arises under California law upon the tender to the insurer of a potentially covered claim and continues until the lawsuit is concluded or until the insurer shows that facts extrinsic to the third party complaint conclusively negate the potential for coverage. (Scottsdale, supra, 36 Cal.4th at p. 655; Montrose, supra, 6 Cal.4th at pp. 298‑300.) If a duty to defend arises, the insurer must defend the action in its entirety, including claims that are not potentially covered. (Buss, supra, 16 Cal.4th at pp. 48-49.) If a duty to defend has arisen by virtue of the existence of a potential for coverage but is later extinguished, it is extinguished prospectively only, and not retroactively. (Id. at p. 46.)

A liability insurer has a duty to defend its insured under Texas law if facts alleged in the complaint potentially could give rise to coverage under the policy. (GuideOne Elite v. Fielder Rd. Baptist Church (Tex. 2006) 197 S.W.3d 305, 310 (GuideOne); Heyden Newport Chemical Corp. v. Southern Gen. Ins. Co. (Tex. 1965) 387 S.W.2d 22, 26 (Heyden).) A plaintiffs factual allegations that potentially support a covered claim is all that is needed to invoke the insurers duty to defend [citation]. (GuideOne, supra, at p. 310.)  Where the complaint does not state facts sufficient to clearly bring the case within or without the coverage, the general rule is that the insurer is obligated to defend if there is, potentially, a case under the complaint within the coverage of the policy. Stated differently, in case of doubt as to whether or not the allegations of a complaint against the insured state a cause of action within the coverage of a liability policy sufficient to compel the insurer to defend the action, such doubt will be resolved in insureds favor.  (Heyden, supra, at p. 26; accord, Nat. Union Fire v. Mech. Fast Motor Lines (Tex. 1997) 939 S.W.2d 139, 141 (Nat. Union).) Under Texas law, the duty to defend is determined based on the policy terms and the allegations of the complaint, without regard to the truth or falsity of those allegations and without regard to extrinsic evidence. (GuideOne, supra, at p. 308; see also Heyden, supra, at p. 24.) Any doubt as to whether the complaint alleges facts that give rise to a duty to defend must be resolved in favor of the insured.[6] (Allstate Ins. Co. v. Hallman (Tex. 2005) 159 S.W.3d 640, 643; Heyden, supra, at p. 26.) If the duty to defend arises, the insurer must defend the action in its entirety, including claims that are not potentially covered. (Warrantech Corp. v. Steadfast Ins. Co. (Tex.Ct.App. 2006) 210 S.W.3d 760, 766; Nokia, Inc. v. Zurich American Ins. Co. (Tex.Ct.App. 2006) 202 S.W.3d 384, 388.)

Texas law differs from California law in that under Texas law, facts extrinsic to the complaint cannot give rise to a duty to defend. (GuideOne, supra, 197 S.W.3d at p. 308; Heyden, supra, 387 S.W.2d at p. 24.) Under California law, in contrast, extrinsic facts known to the insurer give rise to a duty to defend if the facts create a potential for coverage under the policy. (Scottsdale, supra, 36 Cal.4th at p. 654; Gray, supra, 65 Cal.2d 263, 276-277.) Because the complaints in the underlying actions allege facts that create a potential for coverage without regard to extrinsic evidence, as explained post, this difference between California law and the law of Texas is not relevant here. Apart from this distinction, the foregoing Texas rules of law do not materially differ from California law, and no party has shown that any other Texas rule of law applicable to these facts materially differs from California law. We therefore conclude that the applicable rules of law of California and Texas are substantially identical with respect to a liability insurers duty to defend; thus, even if the governmental interest analysis was the choice of law rule that we were to use to determine if a duty to defend ever arose, California law would be applied. (Washington Mutual, supra, 24 Cal.4th at p. 920.)

c. The Third Party Complaints Allege Claims that Are Potentially

Covered Under the Policy

The complaints allege that the defendants, including Frontier and Wainoco, conducted oil and gas exploration, production, processing, and storage activities at Drill‑Site #1. They allege that as a result of those operations, hazardous substances were spilled, emitted, released, [and] discharged into the environment. They allege further that the operations resulted in releases, discharges, fugitive emissions, leaks and spills. The complaints allege damage of a nature and kind covered by the policy and do not foreclose the possibility that the damage was caused by a sudden and accidental release, and therefore create a potential for coverage under the policy. (Waller v. Truck Ins. Exchange, Inc., supra, 11 Cal.4th at p. 19; Gray, supra, 65 Cal.2d at pp. 274‑275.) This is sufficient to establish RLIs duty to defend. (Montrose, supra, 6 Cal.4th at pp. 299‑300; Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1082‑1083.) RLI potentially could extinguish its defense duty prospectively, but cannot extinguish it retroactively. (Scottsdale, supra, 36 Cal.4th at p. 655; Buss, supra, 16 Cal.4th at p. 46.) RLI failed to show that facts extrinsic to the third party complaints conclusively negated the potential for coverage before the termination of the underlying actions and therefore failed to extinguish the duty to defend before the termination of those actions. Because RLI failed to establish the absence of a duty to defend, RLI was not entitled to summary judgment against Frontier and Wainoco on that basis.

9. RLI Failed to Establish that Wainoco Is Not an Insured

The policy declarations identify the named insured as Wainoco Oil Corporation, et al.[7] (Capitalization omitted.) An endorsement referenced on the declarations page and incorporated in the policy lists several additional named insureds, including Wainoco Oil & Gas Company, and the Northwestern Mutual Life Insurance Co., A Joint Venture and several Wainoco Appalachian partnerships. The commercial general liability coverage form states that if the named insured is a partnership or joint venture, the insureds members and partners are also insureds, but only with respect to the conduct of [the partnerships or joint ventures] business.

RLI argued in its summary judgment motion against Wainoco and argues again on appeal that Wainoco is not an insured with respect to the underlying actions because the alleged conduct does not pertain to Wainocos joint venture activities. As the party moving for summary judgment, RLI had the burden to present either evidence that negates an element of the cause of action or evidence that Frontier and Wainoco cannot reasonably obtain needed evidence. (Kahn v. East Side Union High School Dist., supra, 31 Cal.4th at p. 1003.) RLI cited no evidence in support of its argument that Wainoco is not an insured apart from the policy and the third party complaints. A policy endorsement specifically identifies the Beverly Hills site and supports a reasonable inference that the parties intended the policy to provide coverage for Wainocos operations at the site. The third party complaints allege that Wainoco conducted oil and gas operations at the Beverly Hills site. Nothing in either the policy or the third party complaints forecloses the possibility that Wainocos operations at the Beverly Hills site pertained to its joint venture with Northwestern Mutual Life Insurance Co. Absent evidence to compel the conclusion that Wainocos operations at the site did not pertain to its joint venture business, RLI failed to establish that Wainoco is not an insured.

DISPOSITION

The judgment is reversed. The matter is remanded for further proceedings not inconsistent with the views expressed herein. Frontier and Wainoco are entitled to recover their costs on appeal.

CERTIFIED FOR PUBLICATION

CROSKEY, J.

We Concur:

KLEIN, P. J.

KITCHING, J.

Publication courtesy of California free legal advice.

Analysis and review provided by Carlsbad Property line Lawyers.

[1] We cited Stonewall, supra, 14 Cal.App.4th 637 on this point in Downey Venture v. LMI Ins. Co. (1998) 66 Cal.App.4th 478, 514 (Downey Venture), and stated, [a] liability insurance policy issued on a nationwide basis may be construed in accordance with the law of the jurisdiction in which a particular claim arises. [Citation.] Thus, the same policy language may receive different construction and application in different jurisdictions. We held in Downey Venture that Insurance Code section 533 precluded indemnification for malicious prosecution under California law but did not relieve an insurer of the duty to defend a malicious prosecution claim. (Downey Venture, supra, at pp. 506, 509.) We concluded that despite the bar of indemnification under California law, an express promise to provide coverage for malicious prosecution was not illusory, not only because the insurer was required to defend such claims, but also because a California court could enforce the laws of other states that might not preclude indemnification. (Id. at pp. 514‑516.) Our statement with regard to such a choice-of-law decision by a California court concerned the enforceability of an express contractual promise, rather than contract interpretation.

[2] Moreover, the pollution liability endorsement here expressly states that it forms a part of the policy to which attached.

[3]Gray, supra, 65 Cal.2d at page 274 stated: Since we must resolve uncertainties in favor of the insured and interpret the policy provisions according to the laymans reasonable expectations, [fn. omitted] and since the effect of the exclusionary clause is neither conspicuous, plain, nor clear, we hold that in the present case the policy provides for an obligation to defend and that such obligation is independent of the indemnification coverage. (Italics added.)

[4] In Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287 (Montrose), the Supreme Court made clear that its analysis in Gray, supra, 65 Cal.2d 263 was not limited to policy interpretation: Because the policy at issue in Gray was ambiguous, and could be read either to exclude or to provide for coverage, we held that ordinary principles of insurance contract interpretation required it be construed in the insureds favor, according to his reasonable expectations. (Gray, supra, 65 Cal.2d at pp. 275‑276; [citation].) As a distinct, separate, and alternative basis for our decision, we recognized that the insured is entitled to a defense if the underlying complaint alleges the insureds liability for damages potentially covered under the policy, or if the complaint might be amended to give rise to a liability that would be covered under the policy. (Gray, supra, 65 Cal.2d at pp. 275‑276.) [] The alternative holding in Gray, supra, 65 Cal.2d 263, establishes the rule that the insurer must defend in some lawsuits where liability under the policy ultimately fails to materialize; this is one reason why it is often said that the duty to defend is broader than the duty to indemnify. [Citation.] (Montrose, supra, at p. 299.)

[5] We explain our conclusion under Civil Code section 1646 that California law governs the interpretation of the policy in section 6, ante.

[6] RLI quotes language from Nat. Union, supra, 939 S.W.2d at page 142, stating: We will not read facts into the pleadings. [Citation.] . . . Nor will we look outside the pleadings, or imagine factual scenarios which might trigger coverage. The complaint against the insured in that case alleged that the insureds driver negligently discharged a firearm while driving a truck, killing a passenger in another vehicle. (Ibid.) The Texas Supreme Court concluded that the facts alleged in the complaint did not indicate that the death resulted from use of the insured vehicle, as required for coverage under the policy. (Id. at p. 142.) The court stated, the facts alleged in the pleadings do not suggest even a remote causal relationship between the trucks operation and Gonzalezs injury. (Ibid.) It was in this context that the court, in the language quoted ante, refused to augment the allegations of the complaint in the guise of a liberal construction.

[7] Wainoco Oil Corporation was predecessor in interest to Frontier, as stated ante, and is to be distinguished from Frontiers wholly-owned subsidiary, Wainoco.