By Duane W. Shewaga
Adleson, Hess & Kelly, APC
Campbell, California
On December 29, 1997, the California Supreme Court issued its opinion in the Aerojet-General Corporation v. Transport Indemnity Company saga reaffirming that the duty to defend is broader than the duty to indemnify and that an insurer may owe a duty to reimburse the policyholder for site investigation costs in connection with an environmental claim as part of its defense duty. (97 D.A.R. 15551.)
The case is well worth reading for its comprehensive examination of the scope
of an insurer's duty to defend and for the examples the Supreme Court provides
on various issues encompassed by the duty to defend. For example, the Supreme
Court stated that where an insured "may possibly have discharged" a
hazardous substance within the policy period of a single year even if further
damage was caused for an additional thirty years, the insurer "must defend
[the] Insured as to the claim in its entirety." The Supreme Court reemphasized
that in a mixed claim, where only a part of the claim may "possibly" be
covered, the insurer must still defend the policyholder "immediately" and
it must defend "entirely."
The Supreme Court held that site investigation costs were recoverable as investigation
costs that the insurer must pay for in fulfilling its duty to minimize liability
as a part of its duty to defend. Site investigation costs were held to be recoverable
where the investigation is conducted after the tender of the defense and before
conclusion of the claim. Also, the site investigation must constitute a reasonable
and necessary effort to avoid or minimize liability, as well as be reasonable
and necessary for that purpose.
The insured must carry the burden of proof of these elements by a preponderance
of the evidence. However, the Supreme Court also stated that where the insurer
breached its duty to defend, the insured need only prove the existence and
the amount of the site investigation expenses which are then presumed to be
reasonable and necessary defense costs. It is the insurer that must prove that
they are in fact unreasonable or unnecessary.
The Supreme Court also addressed whether the site investigation costs could
be apportioned to Aerojet. Aerojet was self-insured as to defense costs for
a number of years spanning the claim. Although the Supreme Court stated that
Transport Indemnity could attempt to allocate defense costs under the holding
of its recent Buss decision, the Supreme Court reversed the Court
of Appeal holding that these costs could be allocated on a pro rata basis for
the amount of time Aerojet was self-insured for defense costs. The Supreme
Court held that although insurers may seek contribution among themselves as
to defense costs, "that is all: an insured is not required to make such
a contribution". The Supreme Court restated the rule "if specified
harm may possibly have been caused by an included occurrence and may possibly
have resulted, at least in part, within the policy period, the duty to defend
perdures to all points of time at which some such harm may possibly have resulted
thereafter."