Facts

Defendant ESCO Rubber Products, Inc. manufactured natural and synthetic rubber plumbing products at its plant in Brea, California. On April 23, 1996, defendant's plant caught fire when sparks from its employees' grinding operations ignited nearby combustible materials. The City of Brea's fire department was called upon to suppress the fire. During the two days that it took to extinguish the fire, water from the fire suppression efforts mixed with burnt materials and other contaminants stored on site. The toxic runoff went into the city's storm drain system and ultimately deposited in a local lake, killing aquatic wildlife and soiling waterfowl.

The City of Brea hired outside vendors to test and clean up the storm drain system and lake. Testing revealed the presence of various pollutants in the drainage channel and lake. The outside vendors billed the city $537,554.51 to remediate the effects of those pollutants. The day after the fire the city told defendant that it would seek reimbursement from defendant of those remediation expenses.

Following the fire, defendant made a first-party property claim to plaintiff Safeco Insurance Company of America for the destruction of its property. At the time of the fire, defendant was underinsured by approximately $900,000. Within three months of the fire, plaintiff had paid defendant policy limits of $1,840,000. Defendant used those insurance proceeds to get back into business.

On April 21, 1997, the City of Brea sued defendant to recover the $537,554.51 that it had paid to outside vendors to clean up the effects of the contaminated runoff, the $38,884.05 that it had incurred in responding to the fire, prejudgment interest on those amounts, punitive damages, and attorney's fees. Defendant tendered its defense to plaintiff under the liability coverage of its policy. Plaintiff accepted tender, retaining counsel to defend defendant and reserving its right to deny coverage and seek reimbursement from defendant for damages excluded by the policy's "Total Exclusion Policy."

During discovery, retained counsel learned that one of the vendors had overcharged the City of Brea by about $100,000 and that the city's tardy erection of barricades permitted runoff to enter the storm drains. Because of these things, retained counsel believed that the settlement value of the city's case against defendant was in the $300,000 to $400,000 range even though the City of Brea was claiming total damages in excess of $700,000. Pretrial settlement discussions broke down, with the city demanding $475,000 and plaintiff on behalf of defendant offering $335,000.

In response to the City of Brea's motion in limine, the court ruled that defendant could not challenge the billings by the outside vendors or assert comparative fault against the city. That ruling precluded defendant from challenging the damages claimed by the city, and the city's demand during trial increased to $715,000. With defendant's knowledge and consent, plaintiff ultimately settled the suit on defendant's behalf for $615,000, an amount within the limits of the liability coverage.

Plaintiff sued defendant for reimbursement of that portion of the underlying settlement excluded by the "Total Pollution Exclusion." Defendant cross-complained against plaintiff for breach of contract and bad faith, claiming that plaintiff owed it an additional $25,000 under the property coverage for liability for fire department service charges, that plaintiff had a duty to provide independent counsel in defense of the City of Brea's suit, and that the delay in settling with the city had harmed defendant.

The court granted summary judgment adjudication to plaintiff on all issues except defendant's breach of contract claim for $25,000. A jury returned a verdict for defendant on that issue. On April 23, 2001, a net judgment of $616,748.48 was entered in plaintiff's favor. Defendant appealed.

During the appeal, the California Supreme Court decided Blue Ridge v. Jacobsen (2001) 25 Cal. 4th 489, which establishes the showing that an insurer must make in order to recover reimbursement from its insured. Because the court did not consider those factors in granting summary judgment in favor of plaintiff, the court of appeal reversed the judgment so those factors could be considered. The unqualified reversal returned all issues to the trial court.

PLAINTIFF'S CONTENTIONS:
On the complaint, plaintiff contended the entire $537,554.51 in third-party vendor charges sought by the City of Brea in its suit against defendant were excluded by the "Total Pollution Exclusion." It sought reimbursement in the amount of $436,115.95, representing the difference between $475,000, the lowest amount demanded by the city in the underlying action, and $38,884.05, the only damages potentially covered.

On the cross-complaint, plaintiff/cross-defendant asserted that defendant/cross-complainant's liability for the fire department service charges was resolved by the settlement of the underlying suit. It denied that defendant/cross-complainant was entitled to independent counsel and that it had breached the policy or acted in bad faith. Plaintiff/cross-defendant asserted that defendant/cross-complainant was at all times aware that the City of Brea would be seeking reimbursement from it for pollution clean up costs, and it reinvested insurance proceeds into the business while knowing of that claim.

DEFENDANT'S CONTENTIONS:
On the complaint, defendant contended that the "Total Pollution Exclusion" was inapplicable. It claimed that the contamination was due to covered fire suppression efforts and not the result of an uncovered pollution release.

On the cross-complaint, defendant/cross-complainant claimed that if plaintiff/cross-defendant had informed it of the magnitude of the City of Brea's claim it would not have reinvested the insurance proceeds in the business. As damages, defendant/cross-complainant sought repayment of the $1,840,000 in insurance proceeds and approximately $900,000 in loans that it had taken out. Defendant/cross-complainant also sought $25,000 for fire department service charge coverage and attorney's fees paid to personal counsel who participated in its defense of the City of Brea's suit.

Settlement Discussions

Plaintiff offered $35,000 net to defendant to resolve all claims, including the cross-complaint. Defendant demanded $4 million. Defendant's demand was later reduced during trial to $1,420,000.

Result

On March 24, 2006, the jury returned a verdict for plaintiff on its complaint in the amount of $436,115.95. It also found for plaintiff/cross-defendant on the cross-complaint for breach of contract and bad faith. Plaintiff intends to file a motion for prejudgment interest.

Deliberation

one day

Length

six days