Houston General Insurance v. Ag Production Co.

Citations: 840 F. Supp. 738; 1993 U.S. Dist. LEXIS 19138; 1993 WL 546974Docket: CV-F-93-5475 REC

Court: District Court, E.D. California; November 30, 1993; Federal District Court

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The United States District Court for the Eastern District of California ruled on cross motions for summary judgment between Houston General Insurance Company (plaintiff) and AG Production Company and Chemurgic Agricultural Chemicals, Inc. (defendants). The court granted Houston's motion for summary judgment and denied that of the defendants. Houston sought a declaratory judgment stating it had no obligation to defend or indemnify the defendants in a lawsuit initiated by the City of Modesto and Del Este Water Company, which alleged soil and groundwater contamination from pesticides (specifically DBCP and EDB) used from 1977 to 1985. The complaint indicated that contamination made the water unusable by January 1990, and there were concerns about ongoing migration of contaminants toward other wells. Houston's insurance policy, effective from March 1, 1992, to March 1, 1993, included coverage for bodily injury and property damage, but the court found that the claims in the Modesto Complaint fell outside the policy's coverage terms. Houston had previously assumed the defendants' defense with a full reservation of rights, which included disclaimers of coverage for certain claims. The ruling emphasizes that the claims in the Modesto Complaint do not constitute "occurrences" as defined in the insurance policy.

Exclusion from coverage pertains to losses or expenses resulting from governmental mandates related to pollutants. The insured bears the burden of proving that an event qualifies as a claim under the policy. The duty to defend is broader than the duty to indemnify, requiring analysis based on potential liability from the complaint or other available information at the defense tender. This assessment occurs at the beginning of the case, and ambiguity regarding the duty to defend favors the insured. Contamination of groundwater is recognized as third-party property damage under general liability policies; the key issue is whether such damage occurred during the policy period. Houston seeks summary judgment, arguing no coverage exists because property damage was discovered before the policy began, advocating for the "manifestation trigger test." In contrast, Ag Production supports the "exposure trigger" or "continuous trigger" methods and suggests policy ambiguity. California law reflects a divide on the appropriate trigger test in third-party cases. The California Supreme Court ruled that in progressive property loss cases, the statute of limitations begins when appreciable damage occurs and is known to the insured, triggering the notification duty. The court also clarified that loss remains contingent until damage manifests, at which point it is no longer contingent and triggers indemnity unless specifically excluded by the policy.

Insurers are not liable for claims related to losses that manifested before their policy terms began, adhering to the loss-in-progress rule. This rule aligns with the reasonable expectations of insureds, who anticipate coverage from their current insurer. It also provides predictability in underwriting, as insurers are only liable for losses that manifest during their coverage period. The term "inception of the loss" is defined as the point when appreciable damage is known or should be known to the insured, triggering their notification duty. This definition applies equally to "manifestation of the loss," with the determination of the manifestation date often being a factual issue for juries. Summary judgment may be granted if undisputed evidence shows no prior damage, limiting litigation to insurers active when damage became evident. The Supreme Court's ruling is confined to first-party progressive property loss cases within homeowners insurance, noting distinctions between first-party and third-party policies. The Fourth District has previously adopted the manifestation trigger in third-party cases, which has led to a "continuous trigger" approach in subsequent cases, currently under review by the California Supreme Court. Federal courts must adhere to intermediate appellate decisions unless convinced the state’s highest court would rule differently. Conflicting views exist among federal courts regarding the applicability of the manifestation trigger in liability policies.

Judge Smith determined that the appropriate trigger theory for insurance coverage is based on the policy's terms and the nature of the damage. In this case, he favored the "exposure trigger," which activates coverage each time hazardous substances are released. However, the court anticipates that the California Supreme Court will adopt the "manifestation trigger," aligning with the Modesto Complaint's allegations that contamination occurred significantly after exposure. Consequently, Houston is entitled to summary judgment, as the contamination alleged in the Modesto Complaint manifested two years prior to the issuance of Houston's policy, indicating no property damage occurred during the policy period.

Ag Production contends that Houston waived its right to use the manifestation trigger as a defense by not including it in the reservation of rights letter. Citing Intel Corp. v. Hartford Acc. Indem. Co., Ag Production argues that waiver is a factual issue, reliant on the insurer's inconsistent actions leading to the reasonable belief that the right has been relinquished. However, the court found Ag Production failed to demonstrate waiver or a genuine issue of material fact; Houston's reservation of rights letter clearly stated that no property damage occurred during the policy period. The omission of the manifestation trigger in the letter does not constitute a waiver. Furthermore, there is no evidence of misconduct by Houston or detrimental reliance by Ag Production, which is represented by competent counsel aware of the relevant legal standards.

Ag Production contends that there is a duty to defend under the personal injury provision of their insurance policy, citing Hirschberg v. Lumbermens Mutual Casualty, where the court found a potential for coverage due to the ambiguous language regarding personal injury, particularly concerning nuisance and trespass claims. The ruling emphasized that any ambiguity should be resolved in favor of coverage. California courts define trespass as an invasion of exclusive possession of land and nuisance as interference with the use and enjoyment of land. The First Circuit supported the notion that allegations of trespass or nuisance are covered under similar policy language.

In the current matter, the Modesto Complaint alleges ongoing trespass and nuisance related to water systems and property rights, which Ag Production argues establishes a potential for coverage. However, Houston asserts that the personal injury definition in their policy differs from that in Hirschberg, as it does not mention "invasion of the right of private occupancy." Houston argues the Modesto Complaint focuses on damage to tangible property, aligning with the "property damage" definition in their policy. The court concludes that Hirschberg is not applicable, as the Houston policy unambiguously covers loss of use of dwelling or business premises, but not water systems or aquifers. Consequently, the court grants Houston General Insurance Company's Motion for Summary Judgment and denies Ag Production's Motion for Summary Judgment, entering judgment for the plaintiff.

The Ninth Circuit's conclusion primarily drew on rulings from other federal appellate courts rather than California law, raising questions about the authority of Hancock Laboratories as a predictor for the California Supreme Court's decision. The court dismissed Ag Production's argument that the policy was ambiguous due to the inability to determine the manifestation theory of coverage, stating that the terms "occurrence" and its definition under the policy are clear and unambiguous. Ag Production's claim that conflicting California cases regarding the appropriate trigger for coverage suggest a potential for coverage sufficient to invoke the duty to defend was also rejected. The court referenced Montrose Chemical Corporation v. Superior Court, indicating that a legal question regarding policy interpretation does not meet the threshold for potential coverage as envisioned by the case. Ultimately, the court determined it was dealing with a legal question resolvable in the current proceedings, asserting that differing conclusions from other courts do not establish potential coverage relevant to the duty to defend.