Insurer Claiming Reimbursement for Cleanup Costs Entitled to Writ of Attachment Against Insured on Showing Probable Validity of Coverage and Rescission Defenses

In Santa Clara Waste Water Co. v. Allied World Nat’l. Assur. Co. (No. B279679, filed 12/20/17), a California appeals court affirmed the grant of a right to attach order and a writ of attachment against the policyholder for $2.5 million plus costs and interest in a coverage action, on the ground that the insurer had established the probable validity of its claims as required by the attachment statute, Code of Civil Procedure section 484.090.

In Santa Clara Waste Water the insured owned a wastewater treatment facility in Santa Paula. In applying for environmental liability insurance, the insured represented that it did not accept, process, transport, or discharge hazardous waste. The resulting $2 million primary and $5 million umbrella policies covered “‘environmental damage’” or “emergency response expenses” arising out of a “pollution incident.” The policies also contained an “intentional noncompliance” provision, which excluded coverage for damages resulting from the “intentional disregard of or deliberate willful or dishonest noncompliance” with law or regulations.

After obtaining coverage from Allied, a vacuum truck owned by the insured exploded at the facility when a truck driver mixed wastewater with a chemical (sodium chlorite). Chemical spillage from the explosion spontaneously combusted and caused a fire. The insured submitted a claim to cover the cleanup costs, which was denied.

The parties entered mediation and reached a partial settlement including a “Payment Term Sheet.” The Payment Term Sheet provided that Allied would pay $2.5 million to the insured but if Allied obtained a judgment that it was not obligated to pay the insured’s damages under its policy, then the insured would reimburse Allied. Allied paid the $2.5 million. The insured sued Allied for failing to pay damages up to the policy limit. Allied filed a first amended cross-complaint for declaratory relief, reimbursement of defense costs and expenses, unjust enrichment, fraud, rescission, and unlawful business practices.

With the coverage action pending, Allied then filed applications for a right to attach order and writ of attachment against the insured for $2.5 million plus costs and interest based on an express contract (the Payment Term Sheet) and implied contract theories of unjust enrichment and rescission. In support of its applications, Allied presented evidence showing that the intentional noncompliance policy exclusion applied because the insured violated laws and regulations when it stored and concealed the presence of sodium chlorite at the facility. Allied also presented evidence showing that the policy should be rescinded because the insured misrepresented that it did not accept, process, transport, or discharge hazardous waste.

The trial court granted the applications and the appeals court affirmed. Under the attachment statute, a party seeking a prejudgment attachment must demonstrate the probable validity of its claim. (Code Civ. Proc., § 484.090, subd. (a).) Probable validity means that “more likely than not” the plaintiff will obtain a judgment on that claim. (Code Civ. Proc., § 481.190.) The Santa Clara Waste Water court stated:

Allied established the probable validity of its unjust enrichment claim. Where an insurer pays an amount not covered under its policy, it has a right of reimbursement that is implied-in-law under an unjust enrichment theory. (Buss v. Superior Court (1997) 16 Cal.4th 35, 51.) Allied had a right of reimbursement because the intentional noncompliance policy exclusion applied…. [The insured] failed to comply with law and regulations when they stored sodium chlorite at the facility. They were required to report and update a ‘Hazardous Materials Business Plan’ within 30 days of receiving a 275-gallon container of sodium chlorite. (Health & Saf. Code, § 25508.1.) They did not do so…. Moreover, [the insured] failed to comply with law when they concealed chemicals from inspectors. Employees testified that they consolidated and cleaned chemical totes before inspections to hide the presence of unreported chemicals at the facility. Employees removed labels from chemical totes that identified their contents or indicated they were hazardous materials. [The] environmental compliance manager admitted that he ordered employees to move unreported chemicals to a trucking yard before an inspection in order to hide them from the inspectors. The storage of these chemicals at the trucking yard violated [the insured’s] lease with the City of Santa Paula.”

The Santa Clara Waste Water court went on: “Although the unjust enrichment claim alone is sufficient to support an order for prejudgment attachments, Allied also established the probable validity of its rescission claim. Misrepresentation or concealment of a material fact in connection with an insurance application is grounds for rescission of the policy. (Ins. Code, § 359; Superior Dispatch, Inc. v. Insurance Corp. of New York (2010) 181 Cal.App.4th 175, 191.) ‘Each party to a contract of insurance shall communicate to the other, in good faith, all facts within his knowledge which are or which he believes to be material to the contract.’ (Ins. Code, § 332.) In determining whether a fact is material, we consider the ‘probable and reasonable’ effect a misrepresentation of that fact has on the insurer. (Ins. Code, § 334.)

Here, [the insured’s] representation that they did not accept, process, transport or discharge hazardous waste was a material fact because Allied asked questions regarding hazardous waste in its application and related correspondence, including whether [they] transported hazardous waste, the type of waste they disposed of, and several questions regarding their history of hazardous waste discharge. An Allied executive declared that Allied would not have issued a policy under the same terms if [they] had represented that ‘it accepted, stored, or disposed of hazardous waste at any of its facilities….’ Substantial evidence supports the finding that [the insured] misrepresented and concealed this material fact.”

In that regard, the Santa Clara Waste Water court rejected an argument that Allied could not prevail on its rescission claim because it was required but failed to give proper notice and to offer to restore premiums prior to bringing its rescission claim: “[F]iling the action was sufficient to meet those requirements here. [] ‘When notice of rescission has not otherwise been given or an offer to restore the benefits received under the contract has not otherwise been made, the service of a pleading in an action or proceeding that seeks relief based on rescission shall be deemed to be such notice or offer or both.’ (Civ. Code, § 1691.)”

Finally, the Santa Clara Waste Water court affirmed an award of prejudgment interest, running from the date that Allied had paid the $2.5 million.

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December 21, 2017