Insurers Dealt Court Setback on Polluters

The California Supreme Court held Monday that insurance companies must defend accused polluters in court if their liability policies could conceivably cover the toxic discharges.

The unanimous decision was a blow to the insurance industry, which had hoped to escape the multimillion-dollar expense of defending polluters in protracted toxic waste litigation brought by the federal government.

“I think it makes it almost impossible for an insurer to ever resist providing a defense in a pollution case or any other context,” said Douglas Hallett, a Los Angeles attorney who represented one of eight insurance carriers involved in the case.

Montrose Chemical Corp. of California, which dumped tons of the now-banned pesticide DDT into Santa Monica Bay, took its insurers to court after they balked at paying for the company’s defense in a lawsuit filed by the federal and state government.

Montrose faces costs for damages and cleanup ranging from tens of millions to hundreds of millions of dollars, with trial costs alone estimated at $1 million or more a year for several years. The company’s insurance carriers will now have to pay Montrose’s legal costs, although they can go to court later to try to escape responsibility for the eventual judgment in the government lawsuit.

The insurance companies contended that Montrose deliberately dumped the DDT into sewers and cited pollution exclusions in the insurance policies that exempted coverage for intentional discharges.

But Montrose argued that it did not intend or know that the discharges would damage the environment and contended that the damage was covered because it was accidental.

A court of appeal agreed with Montrose, and the California Supreme Court unanimously affirmed the appellate court’s decision.

Even when coverage is disputed, the state high court said, an insurance company has a duty to defend a client if only a possibility exists that the policy might cover the actions that triggered the lawsuit.

“The fact that Montrose’s regular business practices involved the disposal of DDT process wastes could not eliminate the possibility that at least some of the property damage might have resulted from accidental causes,” the court said in an opinion written by Justice Edward A. Panelli.

Montrose Chemical, a now-closed Torrance-based DDT-maker, dumped the pesticide into the ocean through sewer lines in the 1950s and 1960s. An estimated 200 tons of DDT now cover nearly 20 square miles of the sea floor off the Palos Verdes Peninsula.

DDT causes birds to lay eggs with shells so thin that they crack before hatching. The pesticide also can interfere with fish reproduction. In 1991, the state warned residents to limit their consumption of certain species of fish caught in Southern California because the levels of DDT and other pollutants posed cancer risks.

The federal and state governments sued Montrose and other companies in 1990 to recover the cost of cleaning up the pollution and to compensate for the environmental harm caused by the dumping.

Montrose has maintained it should not be liable for the environmental damage because it discharged the pesticide under valid sewage permits.

Hallett, an attorney who represented Travelers Indemnity Co. in the case, said it was “probably the most important insurance case in the last 25 years in California.”

Though disappointed with the the results, Hallett said the decision clarified the rights of the insured to legal representation from the insurance company before the resolution of the lawsuit.

He predicted that insurance premiums to cover companies that may pollute will gradually rise.

Montrose attorney Kristine Wilkes said the potential cost of defending alleged polluters is so high that insurance companies decided “basically to try to change the law of California to limit the defense obligations that have been in place 30 years.”

“They have fought this tooth and nail. . . ,” she said. “We are very very happy with this decision.”

She noted that the insurance companies also filed a suit against Montrose in an attempt to prove that the discharges were deliberate and not covered by the insurance policies. Such a suit would prejudice Montrose’s case with the federal government, she said.

“Our argument was that would be grossly prejudicial and unfair to the insured, who has paid valuable premiums for a defense and instead what they have purchased is an additional prosecutor,” she said.

The California Supreme Court agreed, saying that such a trial should not begin until after Montrose has concluded its litigation with the government, which is in the early stages. The insurers can then go to court to try to prove that the policies did not cover the discharges.