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A Step In The Right Direction: An Administrative Proceeding Where Witnesses Testify and Evidence is Taken is a "Suit" Under CGL Policies


On November 18, 2010, in Ameron International Corporation  v. Insurance Company of the State of Pennsylvania, 2010 Cal. LEXIS 11679, the California Supreme Court finally revisited a much criticized decision which had relieved general liability insurers from defending non judicial proceedings where the policies promise to defend against "suits" by imposing a rather narrow interpretation of that undefined term as a "court proceeding initiated by the filing of a complaint." Foster-Gardner, Inc. v. National Union Fire Insurance Co. (1998) 18 Cal. 4th 857, 887.  In Ameron, the Court determined that an administrative proceeding before the Unites States Department of Interior Board of Contract Appeals, initiated by an insured's appeal of a prior decision issued by the United States Dept. of the Interior's Bureau of Reclamation ("Bureau"), finding the insured liable for $40 million in damages, was a "suit" for purposes of triggering the insurer's duty to defend. 

This is a remarkable decision on several fronts.  First, it comes very close to reversing the Foster-Gardner decision, to bring California in line with most of the other jurisdictions addressing commercial general liability coverage for administrative proceedings.  Second, it does not directly mention the fact that the proceeding at issue was actually commenced by the Insured.  Once the Bureau assessed the insured responsible for damages, the insured both appealed the decision by commencing an administrative proceeding and sought protection from its insurer.  This point was not directly addressed anywhere in the decision but will undoubtedly be useful for policyholders seeking coverage for affirmative claims which are in essence defensive strategies.

By way of background, some twelve years ago in 1998, the Court in Foster-Gardner created its "bright-line rule" for defining the term "suit" as meaning only "actual court proceedings initiated by the filing of a complaint." (Id. at 869).  By limiting an insurer's duty to defend only to actual court proceedings, the Foster-Gardner Court had two main goals: one, to minimize the litigation associated with determining case-by-case whether a specific action amounts to a "suit"; and two, to set forth a "complaint-requirement" so that insurers can rely on the information in the complaint to determine if the underlying suit addresses policy provisions implicating insurance coverage.  [Cite] The later decision Certain Underwriters v Superior Court  (2001) 24 Cal. 4th 945, 951, ("Powerine I") extended this holding  by determining that an insurer's promise to "pay all sums" the insured was "legally obligated to pay as damages" applied only to sums ordered by a court, as opposed to expenses required by an agency's administrative directive, such as a "clean up order".  In , Powerine Oil Co. v. Superior Court  (2005) 37 Cal 4th 377, 383, 398-405, (Powerine II) the Court first limited its analysis by emphasizing the specific language in the policies at issue.  Where the coverage provisions included the word "expenses" as well as "damages", the Powerine II Court determined that the policy did require the insurers to indemnify the insured for the cleanup costs. 

Notably, following Foster-Gardner, similar cases around the country refused to adopt the "bright line rule" articulated in the decision, as Justice Kennard's concurring opinion in Ameron pointed out.  The majority opinion in the Ameron case all but overruled Foster-Gardner by severely limiting its application.  It did so by extending the definition of "suit" to include administrative proceedings which require a complaint or complaint-like pleadings. 

However, the Ameron Court opinion avoids directly overruling Foster-Gardner by addressing Foster-Gardner's two main goals in a rather indirect fashion.  First the goal of preventing unnecessary litigation is not inhibited by the expansion of the definition of "suit" to include an adjudicatory  administrative action.  The term "suit" is still well-enough defined to prevent future litigation on the matter, per the Court.  However in a concurring opinion, Justice Kennard, who long criticized the ruling in Foster-Gardner as being "far outside the mainstream of American insurance law," noted, "the court implicitly rejects Foster-Gardner's reasoning that ‘suit' unambiguously refers only to court proceedings." (Ameron Int'l Corp. v. Ins. Co. of the State of Pa., 2010 Cal. LEXIS 11679, at *35-36 (Cal. Nov. 18, 2010)).    

As to Foster-Gardner's second goal, the Ameron Court notes that the pleadings in the administrative proceedings at issue in Ameron "serve the purpose ascribed to the court complaint as described in Foster-Gardner, namely, informing the insurer of the nature of the dispute so that it can determine its defense duties under the insurance policy." (Ameron at *26-27).  However, since the Bureau did not begin this administrative proceeding with a complaint against the insured, from which the insurers could determine if coverage applies, it is a bit unclear how this goal is actually met.  It would appear that the insurers are left to figure out the nature of the claims against their insured – whether they at least potentially lie within their coverage -- by extrapolating them from the record supporting the Bureau's order, from which the insured appealed in its "complaint" commencing the administrative proceeding.

The Bureau's decision against the insured was a citation of responsibility for damages amounting to little more than a "threat to take legal action"—substantially similar to the facts of Foster-Gardner.  It was the administrative proceedings initiated by the insured that actually determined the scope of liability.  The holding in Ameron repeats the maxim that "any ambiguity in the policy terms will be construed against the insurer to protect the insured's reasonable expectation of coverage" and, on that basis, found that it was reasonable for an insured to expect that federal adjudicative administrative agency board proceedings would implicate the insurer's duty to defend. (Ameron at *31). 

The Ameron Court also promotes the use of administrative proceedings in cases where there is concurrent jurisdiction with the United States Court of Federal Claims, or in another formal court forum.  (Ameron at *25-26) This rationale is broadly in line with the courts' general promotion of the use of arbitration as an alternative to litigation.  When a party has a choice of forums, the Ameron opinion should encourage use of the quasi-judicial adjudicative proceedings if otherwise desirable, as this choice will not now impair the policyholder's right to a defense, and will allow the insured to move positively and assertively to protect its rights.

Overall, as Justice Kennard puts it so well, this decision is a "step in the right direction."  Given the uniform rejection of the logic of the so-called "bright line rule" in so many other jurisdictions across the country, we can only hope that sooner or later, the Court will forthrightly admit its earlier mistake and, when the opportunity presents, will inevitably and directly over-rule the now discredited Foster-Gardner decision.

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