There was a major change in California insurance law in 2010 when the California Supreme Court issued its decision in Ameron International v. Insurance Company of the State of Pennsylvania (2010) 50 Cal.4th 1370. That decision requires insurers to revisit their understanding of the scope of the duty to defend under California law. In Ameron, the Court held a quasi-adjudicative proceeding was a “suit” for purposes of triggering coverage under comprehensive a general liability (“CGL”) insurance policy.
Ameron specifically modified the Court’s prior seminal duty to defend holding in Foster-Gardner, Inc. v. National Union Fire Insurance Co. (1998)18 Cal.4th 857. In Foster-Gardner, the Court held that an administrative agency proceeding identifying the insured as a party potentially responsible for environmental contamination was not a “suit” under a pre-1986 policy. Thus, the Court held that the insurer did not owe the insured a defense for the tendered claim, but rather, a discretionary and optional duty to investigate. Since Foster-Gardner, insurers have been successfully denying insureds’ duty to defend claims for anything less than an actual lawsuit against the insured, including denying coverage for governmental and environmental investigations and clean-up orders.
The Ameron decision is very important because the Court specifically held that insurer may have a duty to defend against insured in a proceeding that was not a regular civil court lawsuit. The proceeding at issue in Ameron was an appeal of a decision by a government contracting fficer that had found the insured liable for $40 million in damages for concrete siphons that the insured had manufactured for use in a government construction project. The insured had challenged the decision by appealing to the United States Department of Interior Board of Contract Appeals (“IBCA”), and sought a defense from its insurer under its CGL policy. The Court held that the insurer did have a duty to defend that the quasi-adjudicative IBCA proceeding.
The Court in Ameron held that the ICBA proceeding was a “suit,” which triggers an insurer’s duty to defend, because the Court concluded that the ICBA proceeding was sufficiently similar to a typical lawsuit filed in civil court. The Court’s decision focused on the following facts about the tendered ICBA proceeding: it was initiated by the filing of a complaint; witnesses could be subpoenaed and cross-examined; rules of evidence applied to the proceeding; and money awards could be issued by the administrative law judge. The Court stated that the “the IBCA proceeding provides contractors [insureds] with their ‘day in court,’” and a “reasonable policyholder would recognize such proceedings as a suit
and would expect to be defended and, if necessary, indemnified by its insurer.”
Ameron has created an important exception to the Foster-Gardner bright-line rule that only actions in a court of law count as “suits” under CGL policies. Because the rule has been breached, insureds have increased their attack to expand the scope of the duty to defend under California law. There are a number of pending actions in California that seek to further blur the Foster-Gardner bright-line rule. For instance, also last year the California Court of Appeal held in an unpublished decision that an insurer had a duty to defend and insured in pre-lawsuit dispute resolution proceedings required by a California statutory provision for construction defect claims by condo owners. Clarendon America Ins. Co. v. Starnet Ins. Co. (2010) CA4th , , CR3d , (2010 WL2904995.)
In light of Ameron and Clarendon, insurers need to review their claims handling policies and practices on measuring the duty to defend for claims that are less than traditional superior court actions. There are a wide range of types of claims and administrative actions, ranging from the least adjudicative PRP letter (such as that at issue in Foster-Gardner), to adjudicative administrative quasi-adjudicative proceeding (like the one in Ameron). As to everything in between, insurers need to make a case-by-case duty to defend determination, which was previously thought to be foreclosed by Foster-Gardner. In each case, the question will be whether the claim against an insured is a “suit” requires carefully analysis of the proceeding in light of the insured’ “reasonable expectations.”