County of San Bernardino v. Pacific Indemnity Co. (56 Cal. App. 4th 666, 1997)

Opinion

KREMER, P. J.

Defendant Pacific Indemnity Company (Pacific) appeals the portion of a court judgment entered upon the parties’ stipulation that Pacific was contractually obligated to defend plaintiff County of San Bernardino (County) in two underlying lawsuits brought against the County. We affirm that portion of the judgment.

The County appeals the portions of the judgment entered upon the parties’ stipulation that Pacific was responsible only for 50 percent of the defense costs in those lawsuits and that the hourly attorney fee rate Pacific was required to pay in defending one of those suits was statutorily limited under Civil Code section 2860, subdivision (c). We reverse those portions of the judgment and direct the superior court to enter a new judgment favoring the County on such issues.

I

Introduction

Pacific provided the County with primary comprehensive general liability (CGL) insurance for more than 25 years. When Pacific’s policies terminated, the County did not obtain replacement coverage.

Beginning while Pacific’s policies were in effect and continuing after their expiration, the County operated a landfill. More than a decade after Pacific’s policies expired, owners of adjacent land filed lawsuits against the County for property damage caused by toxic gases emitted from the landfill. The County tendered defense of those actions to Pacific. Pacific provided a defense under reservation of rights and demanded that the County as “self-insured” pay a portion of its defense costs.

The County sued Pacific, alleging Pacific was contractually obligated to provide a defense in the underlying lawsuits and bear all defense costs. The court summarily adjudicated that Pacific owed the County a duty to defend. However, the court denied the portion of the County’s motion seeking summary adjudication that Pacific was required to pay all defense costs, concluding there were triable factual issues about the extent of Pacific’s obligation in light of the County’s responsibility to share defense costs since it was self-insured for much of the relevant period. The court also concluded with respect to the second underlying lawsuit there was a triable factual issue about the extent of Pacific’s responsibility since section 2860 limited the hourly attorney fee rate Pacific was required to pay to defend the County.

The parties stipulated to entry of judgment declaring Pacific had a duty to defend the County in both underlying lawsuits, Pacific was responsible for 50 percent of reasonable defense costs including attorney fees in each suit, and section 2860, subdivision (c), applied to limit the hourly attorney fee rate Pacific must pay to defend the second of those actions. The court entered judgment on the parties’ stipulation.

Pacific appeals the portion of the judgment declaring it had a duty to provide the County with a defense in the underlying lawsuits. The County appeals the portions of the judgment providing that Pacific was responsible only for 50 percent of the defense costs in the two underlying actions subject to section 2860’s limitation in the second action.

II

Facts

A

County Operates Landfill While Insured by Pacific

Effective December 1, 1947, Pacific provided the County with CGL coverage for bodily injury damages under policy No. LAC 31472. Under the policy, Pacific agreed to “insure the Insured against loss by reason of the liability imposed by law upon the Insured, or assumed by the Insured under written contract, for damages, including damages for loss of services, on account of occurrences causing bodily or mental injuries or illness . . . suffered or alleged to have been suffered during the policy period . . . Pacific also agreed to “defend suits for damages, even if groundless, brought on account of such occurrences in the name and on behalf of this Insured

In 1955 the County began operating a waste disposal facility in Ontario, California, known as the Milliken Avenue Landfill (the Landfill).

Effective October 23, 1962, endorsement 66 of policy No. LAC 31472 extended “personal injury liability coverage” for “all sums which the insured shall become legally obligated to pay as damages because of injury sustained by any person or organization and arising out of’ certain specified “hazards,” including “invasion of privacy, wrongful eviction or wrongful entry . . . .” Under that endorsement, Pacific also agreed to “defend any suit against the insured alleging such injury and seeking damages which are payable under the terms of this endorsement, even if any of the allegations of the suit are groundless, false or fraudulent. . . .”

Effective July 23, 1965, Pacific provided the County with CGL coverage for personal liability and property damage liability under policy No. LP 10100. Under the policy, Pacific agreed to “pay on behalf of the insured all sums which the insured shall become obligated to pay by reason of liability imposed by law ... or liability assumed by contract, insofar as the named insured may legally do so, for damages: (1) because of bodily injury, sickness or disease . . . sustained by any person or persons, or (2) because of any other injury a person may suffer to his person, including . . . invasion of privacy, wrongful eviction or wrongful entry.” Pacific also agreed to “pay on behalf of the insured all sums which the insured shall become obligated to pay by reason of liability imposed by law ... or liability assumed by contract, insofar as the named insured may legally do so, for damages, including consequential damages, because of injury to or destruction of property, including the loss of use thereof.” Pacific further agreed to “defend” in the County’s “name and behalf any suit against the insured claiming such damages, even if such suit is groundless, false or fraudulent. . . .” The policy provided it applied “only to occurrences which take place during the policy period . . . .” The policy defined “occurrence” as “an accident or a continuous or repeated exposure to conditions which result in injury to persons or damage to property during the policy period

On September 15, 1968, policy No. LAC 31472 expired.

On July 23, 1973, the County terminated policy No. LP 10100 before its expiration. The County did not purchase another primary CGL policy.

B

Neighboring Landowners Sue the County

In 1980 Vina Vista Venture-New Joint Venture (VVV) apparently granted Ontario Industrial Partners (OIP) an option to buy property adjoining the County’s Landfill.

On July 3, 1986, OIP sued the County for alleged damage to the property adjoining the Landfill. (Ontario Industrial Partners v. County of San Bernardino (Super. Ct. San Bernardino County, 1986, No. OCV 38850)—the OIP action.) Asserting causes of action for negligence, interference with prospective economic advantage, nuisance, injunction and inverse condemnation, OIP’s complaint alleged the County negligently allowed dangerous gases to migrate from the Landfill onto the adjacent property causing permanent injury to the property upon exposure, contaminating its soil, requiring removal of hazardous waste from the property, and diminishing the property’s market value.

On December 10, 1986, the County tendered defense of the OIP action to Pacific under policy No. LP 10100.

On September 30, 1987, Pacific advised it would provide the County a defense in the OIP action under reservation of rights. Pacific consented to Latham & Watkins serving as independent counsel to defend the County in the OIP action.

On November 23, 1987, Pacific advised that the County must share in defense of the OIP action since the County “chose to be self-insured from 1973 forward” and that Pacific would contribute 50 percent of defense costs.

On July 10, 1990, VVV sued the County for alleged damage to the property adjoining the Landfill. (Vina Vista Venture-New Joint Venture v. County of San Bernardino (Super. Ct. San Bernardino County, 1990, No. RCV 054057)—the VVV action.) Asserting causes of action for negligence, interference with prospective economic advantage, nuisance, injunction and inverse condemnation, VVV’s complaint alleged the County negligently allowed dangerous gases to migrate from the Landfill onto the adjacent property causing permanent injury to the property upon exposure, contaminating its soil, requiring removal of hazardous waste from the property, and diminishing the property’s market value.

On August 21, 1990, the County tendered defense of the VVV action to Pacific under policy No. LP 10100 and advised that Latham & Watkins was its choice as defense counsel.

On August 19, 1991, the County settled the OIP action.

On December 10, 1991, Pacific advised it was declining to defend the VVV action on the ground the damages sought did “not constitute a claim for property damage caused by an occurrence.”

On May 29, 1992, Pacific advised it agreed to provide the County a defense in the VVV action under reservation of rights and indicated it would “look to the County for its proportionate share of defense costs (50%) due to the election of the County to be self-insured.” Citing section 2860, Pacific also stated it would pay $150 hourly for attorneys with at least four years of experience and $130 hourly for attorneys with less than four years experience.

Ill

Superior Court Proceedings

On September 17, 1992, the County filed this lawsuit against Pacific for declaratory relief, breach of contract, breach of the implied covenant of good faith and fair dealing, and injunction. The County’s complaint sought a declaration that Pacific had a duty to defend the OIP and VVV actions. The County’s complaint also sought recovery of all defense costs incurred and to be incurred in those underlying actions.

On July 22, 1993, the County filed a motion for summary judgment or summary adjudication, asserting Pacific was obligated to provide a defense and reimburse all past and future defense costs in the underlying actions. In moving for summary judgment, the County sought a determination Pacific had a duty to defend the County in the OIP and VVV actions, Pacific breached that duty in both lawsuits, and Pacific should be enjoined to pay the reasonable attorney fees/costs incurred by the County in defending the VVV action as such fees/costs were incurred. In its alternative request for summary adjudication, the County sought determinations there were no defenses to its causes of action for (1) declaratory relief about Pacific’s duty to defend each underlying action, (2) Pacific’s breach of contract in not defending the County in those actions, and (3) injunctive relief directing Pacific to pay defense fees/costs in the VVV action as incurred.

On December 13, 1993, after hearing, the superior court entered an order denying the County’s motion for summary judgment. The court granted in part and denied in part the County’s motion for summary adjudication. Specifically, the court summarily adjudicated as a matter of law that Pacific had a duty to defend the OIP and VVV actions, concluding the allegations of the complaints in those underlying actions sought to hold the County liable for damage and injury “potentially” covered under both policies. The court denied summary adjudication on the County’s causes of action for breach of contract. Noting the County became “self-insured” as of July 23, 1973, and as a self-insurer during much of the relevant period the County was “responsible for sharing” in its defense costs, the court concluded there were triable issues as to how much of the County’s defense in the underlying actions Pacific was responsible to pay and, with respect to the VVV action, section 2860 applied to limit the hourly attorney fee rate Pacific must pay toward such defense.

In March 1994, the parties stipulated that judgment be entered declaring that Pacific had a duty to defend the County in the OIP and VVV actions from their inception. The parties also stipulated that judgment be entered ordering Pacific to reimburse the County within 45 days for Pacific’s share of all reasonable attorneys’ fees/costs incurred in defense of the VVV action not yet paid by Pacific and for Pacific’s share of all future reasonable attorney fees/costs incurred in defense of the VVV action within 45 days of receiving billing statements from the County. The parties further stipulated that judgment be entered providing that Pacific was responsible for 50 percent of all reasonable attorney fees/costs incurred in defending the two underlying actions and that section 2860, subdivision (c), applied to limit the hourly attorney fee rate Pacific must pay to defend the County in the VVV action.

On March 22, 1994, in accord with the parties’ stipulation, the superior court entered “Judgment By Court Under C.C.P. § 437c And Stipulated Judgment Disposing of Entire Action As To All Parties.”

Pacific appeals the portion of the judgment declaring it had the duty to defend the County in the OIP and VVV actions.

The County appeals the portions of the judgment providing that Pacific was obligated for only 50 percent of defense costs incurred in defending the two underlying actions and that section 2860 applied to limit the hourly attorney fee rate Pacific was required to pay in defending the County in the VVV action.

IV

Discussion

A

Scope of Review

As noted, in summarily adjudicating the County’s causes of action for declaratory relief, the superior court determined as a matter of law that Pacific had a duty to defend the County in the OIP and VVV actions. In concluding the County was not entitled to summary adjudication on its causes of action for breach of contract, the court stated there were triable factual issues as to how much of the costs of defending the County in the underlying actions Pacific was responsible to pay since the County as self-insured for a large portion of the relevant period was responsible for sharing in such defense costs and, with respect to the VVV action, section 2860 applied to limit the hourly attorney fee rate Pacific was required to pay. In summarily adjudicating the County’s cause of action for injunctive relief, the court determined Pacific had the ongoing duty to defend the County in the VVV action since the inception of such lawsuit but stayed its ruling granting summary adjudication on such cause of action “subject to future findings by the Court” as to what portion of the County’s defense in the VVV action Pacific was obligated to pay in light of the self-insured County’s responsibility to share defense costs and section 2860’s limitation on the hourly attorney fee rate.

After the superior court made such rulings, the parties stipulated to entry of judgment declaring Pacific had a duty to defend the County in both underlying actions, Pacific was responsible for 50 percent of all reasonable defense costs in those suits, and section 2860 applied to limit the hourly attorney fee rate Pacific must pay to defend the County in the VVV action. The court entered judgment upon the parties’ stipulation.

By its express terms the judgment entered upon the parties’ stipulation purports to dispose of the entire case. The precise wording of the stipulation is also susceptible to interpretation as foreclosing the parties’ appeals. Nonetheless, we interpret the stipulation as intended to preserve for appeal the three “pure” legal issues of Pacific’s duty to defend the County in the underlying actions, the County’s obligation to share in costs of defending those actions, and the applicability of section 2860 to limit the hourly attorney fee rate Pacific was required to pay for defense of the County in the VVV action. Hence, we entertain the parties’ appeals. (Building Industry Assn. v. City of Camarillo (1986) 41 Cal.3d 810, 817 [226 Cal.Rptr. 81, 718 P.2d 68]; Dong v. Board of Trustees (1987) 191 Cal.App.3d 1572, 1577 [236 Cal.Rptr. 912].)

However, on this record our review is necessarily limited. In addition to intending to preserve legal issues for appeal by entering into the stipulation, the parties also apparently sought to avoid factual findings by the superior court. As discussed, the only issue summarily adjudicated by the court was Pacific’s duty to defend. The court’s other rulings simply denied the County’s motions for summary judgment and for summary adjudication on its causes of action for breach of contract. Such rulings, by definition, did not constitute factual findings but instead merely indicated the court concluded triable issues of material fact remained for the trier of fact. (Cf. Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 301 [24 Cal.Rptr.2d 467, 861 P.2d 1153].) Indeed, the court’s written order on the motions expressly contemplated future factual findings. However, by specifically declaring Pacific was responsible for 50 percent of defense costs incurred in the underlying actions subject to section 2860’s limitation in the VVV action, the parties’ stipulation stated legal conclusions necessarily involving factual considerations beyond any factual findings made independently by the superior court. In addition to discussing the three legal issues noted, the parties’ appellate briefs now seek to argue various fact-dependent matters never litigated to resolution in the superior court, including Pacific’s asserted breach of the contractual duty to defend, an asserted novation of Pacific’s contractual obligation to defend, OIP’s standing in the underlying action, and assertions of waiver and estoppel against each party. Since the parties declined to litigate such fact-dependent matters in the superior court and the court made no independent factual findings on such matters, we do not reach those fact-based contentions. Within those limitations, we proceed to consider the parties’ appeals.

B

Pacific’s Appeal

Asserting the claims against the County in the underlying actions did not demonstrate the existence of any potential for coverage under its insurance policies so as to trigger a duty to defend, Pacific contends the superior court erred in determining Pacific was contractually obligated to defend the County in those underlying suits. We conclude the court properly determined Pacific had a duty to defend the County in the underlying actions.

1

The Law

(a)

Duty to Defend

The Supreme Court has observed: “It is by now a familiar principle that a liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263 [54 Cal.Rptr. 104, 419 P.2d 168] (Gray).) As we said in Gray, ‘the carrier must defend a suit which potentially seeks damages within the coverage of the policy,’ [Citation.] Implicit in this rule is the principle that the duty to defend is broader than the duty to indemnify; an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded. [Citations.]” (Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1081 [17 Cal.Rptr.2d 210, 846 P.2d 792], italics in original.)

“The duty to defend is determined by reference to the policy, the complaint, and all facts known to the insurer from any source. [Citation.]” (Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at p. 300, italics in original.) “ ‘The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy. Facts extrinsic to the complaint also give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy. [Citation.]’ [Citation.]” (Id. at p. 295.) The “insured is entitled to a defense if the underlying complaint alleges the insured’s 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. [Citation.]” (Id. at p. 299, italics in original.) “Any doubt as to whether the facts establish the existence of the defense duty must be resolved in the insured’s favor. [Citations.]” (Id. at pp. 299-300.)

To prevail on the issue of the duty to defend, “. . . the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot. Facts merely tending to show that the claim is not covered, or may not be covered, but are insufficient to eliminate the possibility that resultant damages (or the nature of the action) will fall within the scope of coverage, therefore add no weight to the scales. Any seeming disparity in the respective burdens merely reflects the substantive law.” (Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at p. 300, italics in original.) “The defense duty is a continuing one, arising on tender of defense and lasting until the underlying lawsuit is concluded [citation], or until it has been shown that there is no potential for coverage .... Imposition of an immediate duty to defend is necessary to afford the insured what it is entitled to: the full protection of a defense on its behalf. [Citation.]” (Id. at p. 295, italics in original.) Hence, once the insured establishes the potential of coverage, the insurer must defend the suit unless it conclusively refutes such potential. (Id. at pp. 295, 300.)

(b)

Trigger of Duty to Defend

“In the third party liability insurance context, ‘trigger of coverage’ has been used by insureds and insurers alike to denote the circumstances that activate the insurer’s defense and indemnity obligations under the policy. .. . ‘[T]rigger of coverage’ is a term of convenience used to describe that which, under the specific terms of an insurance policy, must happen in the policy period in order for the potential of coverage to arise. The issue is largely one of timing—what must take place within the policy’s effective dates for the potential of coverage to be ‘triggered’?” (Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 655, fn. 2 [42 Cal.Rptr.2d 324, 913 P.2d 878], italics in original.) “A recurring problem in interpreting standard CGL policies that provide coverage for injuries ‘caused by an occurrence’ is determining what has come to be called the ‘trigger of coverage’—that is, the operative event which activates the insurer’s defense and indemnity obligations.” (Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. (1996) 45 Cal.App.4th 1, 39 [52 Cal.Rptr.2d 690].)

In Montrose Chemical Corp. v. Admiral Ins. Co., supra, 10 Cal.4th 645, the Supreme Court concluded “the ‘continuous injury’ trigger of coverage should be adopted for third party liability insurance cases involving continuous or progressively deteriorating losses.” (Id. at p. 655.) The court observed: “California courts have long recognized that coverage in the context of a liability insurance policy is established at the time the complaining party was actually damaged.” (Id. at p. 669.) Noting that the standard CGL policy language “provides coverage for bodily injury and property damage that occurs during the policy period,” the court stated that in “the case of successive policies, bodily injury and property damage that is continuous or progressively deteriorating throughout several policy periods is potentially covered by all policies in effect during those periods.” (Id. at pp. 654-655, 689, fn. omitted.)

In Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co., supra, 45 Cal.App.4th 1, the appellate court observed: “Case law has long established that the operative event triggering coverage is the injury. Because occurrence policies (as distinguished from claims-made policies) cover occurrences that result in injury ‘during the policy period,’ the courts in California and elsewhere have concluded that the policies are invoked, or ‘triggered,’ when the injury takes place. [Citations.] [