Rooney v. Eagle Star Ins. Co.

Filed 4/24/07 Rooney v. Eagle Star Ins. Co. CA2/6

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION SIX

Appellants, Patrick Rooney et al.^[1](Rooney), appeal from a judgment of dismissal entered after the trial court sustained, without leave to amend, Eagle Star Insurance Company's (Eagle Star) demurrer to the second amended complaint for breach of contract, insurance bad faith, and declaratory relief. The trial court ruled that the action was barred because Eagle Star's excess insurance policy excluded coverage for inverse condemnation liability. It further ruled that any claim for insurance indemnifiction was premature because the insured, County of Ventura (County), has not yet suffered an ascertainable damage. County was dismissed on the ground that the order sustaining Eagle Star's demurrer mooted the action for declaratory relief. We affirm.

The Federal Action

In 2003 Rooney sued County in federal court after underground fuel tanks owned and maintained by County contaminated Rooney's property. (Patrick Rooney et al. v. County of Ventura et al.,United States District Court, Case No. CV03-7526 JFW (JFWx).) The tank leak dated back to 1969-1970 when County had two policies with Eagle Star: a $1 million primary liability policy and a $4 million excess policy. Rooney sued on theories of negligence, trespass, nuisance, and violation of federal CERCLA statutes (42 U.S.C.  9601 et seq.).

County settled the action by purchasing Rooney's property for $1.43 million. It also assigned to Rooney whatever rights to indemnity it had under the primary and excess liability insurance policies issued from 1966 to 1970.

Rooney filed the instant action for breach of contract, insurance bad faith, and declaratory relief alleging that Eagle Star breached a duty "to indemnify [County on] the Settlement." Eagle Star demurred to the second amended complaint.

The trial court sustained the demurrer without leave to amend because the policy excluded coverage for inverse condemnation liability. It also ruled that any contract claim for indemnity "is premature in that the County has not suffered any currently ascertainable detriment and thus, the plaintiffs as the County's assignees can not [sic] state a cause of action against Eagle Star for breach of contract."

Policy Exclusion for Inverse Condemnation Liability

We review de novo the order sustaining the demurrer, treating the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) Interpretation of an insurance policy is a question of law and follows the general rules of contract interpretation. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18.) Where there is "no potential for coverage and, hence, no duty to defend [or indemnify] under the terms of the policy, there can be no action for breach of the implied covenant of good faith and fair dealing because the covenant is based on the contractual relationship between the insured and the insurer. [Citation.]" (Id., at p. 36.)

Here the action is based on a policy issued almost 40 years ago. The Eagle Star Commercial Umbrella Liability Policy provides coverage for personal injury and property damage claims but excludes coverage for inverse condemnation liability.

The policy endorsement states: "In consideration of the company foregoing its right to initiate cancellation of the Policy at this time, it is hereby agreed that such Insurance as is provided by this Policy does not apply to claims arising directly or indirectly from: []  The operation of the principles of eminent domain, condemnation proceedings or inverse condemnation by whatever name called. []  It is further agreed that with respect to any provision of this Policy, concerning any duty of the company to investigate or defend such claims, such provision shall not apply to claims excluded by the foregoing paragraph." (Emphasis added.)

This is a standard policy exclusion and excludes claims directly or indirectly based on principles of inverse condemnation liability. (See e.g., City of Laguna Beach v. Mead Reinsurance Corp. (1990) 226 Cal.App.3d 822, 826-827, 831.)

Although Rooney asserts that County was not sued for inverse condemnation, the policy exclusion does not depend on the labels given to the causes of action (i.e., negligence, trespass, nuisance) in the federal action. (See e.g., Atlantic Mutual Ins. Co. v. J. Lamb, Inc. (2002) 100 Cal.App.4th 1017, 1034.) Our Supreme Court, anticipating imaginative counsel and the likelihood of artful drafting, has indicated that a third party is not the arbiter of the policy's coverage. [Citations.]" (Hurley Construction Co. v. State Farm Fire & Casualty Co. (1992) 10 Cal.App.4th 533, 538.)

Rooney argues that the policy exclusion is ambiguous and unenforceable.

In construing the policy, the goal is to give effect to the reasonable expectations of both the insured and the insurer. (Julian v. Hartford Underwriters Ins. Co. (2005) 35 Cal.4th 747, 756-757.) The best evidence of the intent of the parties is the policy itself. (City of Mill Valley v. Transamerica Ins. Co. (1979) 98 Cal.App.3d 595, 599.) " 'Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. (Civ. Code,  1636.) Such intent is to be inferred, if possible, solely from the written provisions of the contract. [Citation.]" (TRB Investments, Inc. v. Fireman's Fund Ins. Co. (2006) 40 Cal.4th 19, 27.)

Before 1971, it was uncertain whether public entities had the statutory authority to purchase insurance for inverse condemnation liability. (See Van Alstyne, Inverse Condemnation: Unintended Physical Damage (1969) 20 Hastings L.J. 431, 494, fn. 288.) In 1970, the California Law Revision Commission "concluded that the authority of a public entity to insure against all types of liability based on a theory of inverse condemnation is not clearly established by statute. Accordingly, the Commission recommend[ed] that Sections 990 and 11007.4 of the Government Code be amended to express such authority." (Cal. Law Revision Com., Recommendation: Relating to Inverse Condemnation Insurance Coverage (Oct. 1970) p. 1055.)

In 1971, after Eagle Star issued the policy, the Legislature amended Government Code sections 990 and 11007.4 to make clear that public entities had the authority to insure against inverse condemnation liability. (Stats 1971, c. 140; see City of Mill Valley v. Transamerica Ins. Co., supra, 98 Cal.App.3d at pp. 601-602 [discussing 1971 amendment of Gov. Code  990]; Stonewall Ins. Co. v. City of Palos Verdes Estates (1996) 46 Cal.App.4th 1810, 1837 [discussing availability of inverse condemnation insurance coverage in 1971].) But, appellant's reliance on Stonewall Ins. Co. v. City of Palos Verdes Estates, supra, 46 Cal.App.4th 1810 is misplaced. There the insurer (Jefferson Insurance Company of New York) defended without a reservation of rights and failed to inform the insured of the inverse condemnation exclusion until three weeks before trial. (Id., at p. 1836.) The Court of Appeal held that the insurer was estopped from invoking the policy exclusion because it waited too long to assert it. (Id., at p. 1825.)

The second amended complaint does not allege that County purchased inverse condemnation liability insurance, that County paid premiums to insure against that type of risk, that County believed the policy provided coverage for inverse condemnation liability, or that County tendered the federal complaint to Eagle Star for a defense. In addition, no facts are alleged that Eagle Star refused to defend County on the federal action before Rooney settled. This is significant because Eagle Star had no duty to indemnify unless County timely notified it of the third party claim as required by the notice, assistance, and cooperation clauses in the policy.^[2] (See Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857, 886; Gribaldo, Jacobs, Jones & Associates v. Agrippina Vesischerunges AG (1970) 3 Cal.3d 434, 448-449; Truck Ins. Exchange v. Unigard Ins. Co. (2000) 79 Cal.App.4th 966, 979; Croskey & Heeseman, Cal. Practice Guide: Insurance Litigation (The Rutter Group 2005)  7:604, pp. 7B-32.)

Although the pleadings and Rooney's opening brief make passing reference to the duty to defend, the bad faith action is based on the theory that Eagle Star is liable for failure to indemnify after County settled the federal action. "The question, therefore, is whether actual, not potential, coverage existed. [Citations.]" (August Entertainment, Inc. v. Philadelphia Indemnity Insurance Company (2007) 146 Cal.App.4th 565, 574.)

Rooney argues that other Eagle Star policies may provide coverage even though the second amended complaint specifically refers to the 1969-1970 excess policy. The excess policy (Policy ESU 10-18-23) is attached to the second amended complaint and clearly excludes coverage for inverse condemnation liability. Like the trial court, we disregard allegations that are contrary to the express terms of an exhibit incorporated into the complaint. (Barnett v. Fireman's Fund Ins. Co. (2001) 90 Cal.App.4th 500, 505; US Ecology, Inc. v. State of California (2001) 92 Cal.App.4th 113, 126.) At no time has Rooney alleged that another Eagle Star policy did provide coverage for inverse condemnation liability.

Rooney argues that the federal action was for negligence and nuisance all insurable risks under the policy.^[3] The excess policy, however, excludes coverage for claims "arising directly or indirectly from . . . [t]he operation of the principles of eminent domain . . . or inverse condemnation by whatever name called." (Fn. 2, ante; emphasis added.)

Inverse condemnation and negligence are two ways to characterize the same cause of harm. "[I]nverse condemnation is of the nature of a theory or remedy for vindication of a property owner's cause of action against a public entity for damage to his property. 'A cause of action must be distinguished from the remedy which is simply the means by which the obligation . . . is effectuated. . . .' [Citations.]" (City of Mill Valley v. Transamerica Ins. Co., supra, 98 Cal.App.3d at p. 600.) To hold that inverse condemnation and negligence are distinct causes would render meaningless all insurance policy exclusions for inverse condemnation damages. (Ibid.) "Predicating coverage upon an injured party's choice of remedy or the form of action sought is not the law of this state. [Citation.]" (Vandenburg v. Superior Court (1999) 21 Cal.4th 815, 840.)

In Bauer v. County of Ventura (1955) 45 Cal.2d 276, 285, our Supreme Court held that the negligent maintenance of a public improvement which damages private property constitutes a "taking" and is a form of inverse condemnation. Damage caused by the invasion of water or effluents is often a basis for liability. (Jordan v. City of Santa Barbara (1996) 46 Cal.App.4th 1245, 1257; Varjabedian v. City of Madera (1977) 20 Cal.3d 285, 297 [gaseous emissions from sewer plant].) Inverse condemnation liability may arise where the collapse or rupture of a public improvement damages neighboring property. (Yee v. City of Sausalito (1983) 141 Cal.App.3d 917, 921;Marin v. City of San Rafael (1980) 111 Cal.App.3d 591, 595-596 [flood damage from broken city storm drain]; Powers Farms v. Consolidated Irr. Dist. (1941 ) 19 Cal.2d 123, 125-126 [water seepage through irrigation canal]

The Bauer holding applies here. (Bauer v. County of Ventura, supra, 45 Cal.2d 176.) County's negligent maintenance of the underground fuel tanks was and is the theoretical underpinning establishing liability for inverse condemnation. "[P]roximate cause is established where the public improvement constitutes a substantial concurring cause of the injury, i.e., where the injury occurred in substantial part because the improvement failed to function as it was intended." (Belair v. Riverside County Flood Control Dist. (1988) 47 Cal.3d 550, 559-560 [levee flooding].)

Based on the policy exclusion, the trial court reasonably concluded that the Eagle Star policy did not provide coverage for inverse condemnation liability. No facts are alleged that Eagle Star breached a duty to indemnify County. "[I]t is fundamental that a valid cause of action must exist in the assignor insured before an assignee can prevail against the insurer." (Doser v. Middlesex Mutual Ins. Co. (1980) 101 Cal.App.3d 883, 890.)

Detriment

Rooney has failed to allege that Eagle Star's breach of the policies caused detriment to County and that County's damages are ascertainable. (Civ. Code, 3300, 3301.) The record indicates that the State of California may reimburse County, up to a maximum of $1.5 million, for the reasonable cost of the toxics cleanup. (Health & Saf. Code,  25299.10 et seq; Barry Keene Underground Storage Tank Cleanup Trust fund of 1989.) The state reimbursement and proceeds derived from County's future sale of the land must be applied as an offset against any damages arising from Eagle Star's alleged failure to indemnify County. (See, e.g., Stevens v. Geduldig (1986) 42 Cal.3d 24, 35 [reimbursement by governor's office offset damages caused by local official's negligence]; Plut v. Fireman's Fund Ins. Co. (2000) 85 Cal.App.4th 98, 17 [collateral source rule does not apply to damages for breach of contract]; 1 Witkin Summary of Cal. Law (10th ed. 2005) Contracts  922, p. 1019.) This offset principle is reflected in regulations promulgated under the Barry Keene Underground Storage Tank Cleanup Trust Fund Act of 1989 Act barring "double payment" from the State and "another source" (i.e., Eagle Insurance) for the toxics clean up. (23 tit. Cal. Code Regs.  2812.3.) If County is precluded from receiving double payments to remediate the environmental contamination, so is County's assignee (Rooney).

Moreover, until the property is remediated and sold, any indemnity claim is speculative. Assuming the property is remediated and sold at a gain not an unlikely event in an escalating real estate market County will have suffered no damage. As County's assignee, Rooney " 'stands in the shoes' " of the insured/assignor and has no greater rights than County under the policy. (Doser v. Middlesex Mutual Ins. Co., supra, 101 Cal.App.3d at p. 890.)

Dismissal of County

Rooney argues that the order dismissing County was erroneous and is not a final judgment. We disagree. The trial court advanced the hearing date on County's demurrer and sustained the demurrer without leave to amend. It ruled that the order sustaining Eagle Star's demurrer mooted the cause of action for declaratory relief and dismissed both Eagle Star and County. The dismissal order states: "Counsel for all parties concurred that the claims against the County were mooted by this court's sustaining of Eagle Star's demurrer without leave to amend and thus, the court advanced the hearing on the County's demurrer from its scheduled date of November 8, 2005 to the date of this hearing and ordered the action against the County dismissed on the basis that the plaintiffs' claims against the County were moot." The entry of dismissal constitutes a final, appealable judgment. (Code Civ. Proc.,  581d; Smyth v. USAA Property & Casualty Ins. Co. (1992) 5 Cal.App.4th 1470, 1473.)

The judgment (order dismissing Eagle Star and County) is affirmed. Eagle Star and County are awarded costs on appeal.

NOT TO BE PUBLISHED.

YEGAN, Acting P.J.

We concur:

COFFEE, J.

PERREN, J.

Vincent J. O'Neill, Jr., Judge

Superior Court County of Ventura

______________________________

David E. Wood, Jeffrey A. Kiburtz and Caroline R. Hurtado; Wood & Bender, for Appellants.

Edwin E. Adler and Elizabeth A. Sullivan; Adler Law Group, for Eagle Star Insurance Co., Respondent.

Bruce Alan Finck; Benton, Orr, Duval & Buckingham for County of Ventura, Respondent.

Publication Courtesy of California attorney referral.

Analysis and review provided by Vista Property line attorney.

^[1]Appellants are Patrick Rooney, Andrea Rooney, Andrea C. Rooney, Elizabeth Rooney, and the following minors: Patrick Rooney Jr., Joseph Rooney, Mary Rooney, Michael J. Shields, Margaret Rooney-Shields, Sarah Shields, Michael Shields, and Kaitlin Rose Shields, all suing as assignees of the County of Ventura. .

^[2]The second amended complaint alleges: "Plaintiffs contend that the County had claims under the Policies arising from the Action which were valid, not barred by the County's failure to meet any unwaived conditions precedent to their validity, and therefore susceptible to assignment. The County denies this, has attempted to or did waive the assigned claims in direct communications with Eagle Star, and has asserted (in words and conduct) that the assigned claims were invalid and/or barred by the County's failure to meet conditions precedent to their validity, which would render them not susceptible to assignment."

^[3] Rooney signed a "SETTLEMENT AGREEMENT AND MUTUAL RELEASE" which provided: "PLAINTIFFS agree to accept no value for their claims, actions, and causes of action alleged in the ACTION for bodily injury to any person, or their claims, actions and causes of action alleged in the ACTION based on alleged violations of 42 U.S.C.  9601 et seq. The COUNTY agrees to pay PLAINTIFFS under this AGREEMENT for the damage to and loss of use of the PLAINTIFFS' home and car wash located at 155 Grande Vista and 312 East El Roblar, Ojai, California (collectively 'the PROPERTY')."