AHK Law Office

The California Supreme Court determines that site investigation costs must be paid by an insurer under its duty to defend

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."