California Supreme Court Issues Long-Awaited Decision In Powerine Oil Co. V. Superior Court ("Powerine II")

On August 29, 2005, the California Supreme Court issued its long-awaited decision in Powerine Oil Co. v. Superior Courts (“Powerine II”). In unanimously holding that administratively imposed environmental response costs fall within the insuring agreement of standard umbrella/excess general liability policies, the court ameliorated the impact of its prior decision in Certain Underwriters at Lloyd’s of London v. Superior Court, 24 Cal. 4th 945 (2001) (Powerine I), which held that a primary insurer’s obligation to indemnify “damages” incurred by its insured extended only to “money ordered by a court.” Although at first blush the results reached in Powerine I and Powerine II appear diametrically opposed, the court’s decision reaffirms the proposition that insurance coverage questions hinge on specific policy language. The seeming dichotomy of the results in Powerine I and Powerine II flows from the material distinctions between the primary policy language at issue in Powerine I and the umbrella policy language addressed in Powerine II.

Most significantly, the insuring agreement construed in Powerine II explicitly afforded coverage for “damages and expenses” and included an expansive definition of those terms in an “ultimate net loss” provision, leading the Powerine II court to conclude that “the insuring language of the excess/umbrella policies here in question is broader than that of the standard primary CGL policy at issue in Powerine I and covers costs that the insured must expend in complying with an administrative agency’s pollution cleanup and abatement orders.” The court also pointed to the traditional “gap-filling” role umbrella policies are designed to fill, concluding that a reasonable policyholder “would have expected the policies to grant broader coverage than that provided by the primary insurance.” Significantly, in citing umbrella policies’ “drop-down” function, the court signaled that the policyholder will be able to access the coverage upon exhaustion of what are typically modest self-insured retentions.

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