A California federal court, applying California law, addressed the following three coverage issues in connection with alleged PCE contamination at a property where a dry cleaning company operated:  (1) whether Zurich America and American Guarantee had a duty to defend under their Business Auto Policies; (2) whether Steadfast Insurance Company’s duty to defend eroded the limits of its Environmental Impairment Liability Policy; and, (3) whether Zurich America had a duty to defend under its CGL policy, in light of a “Total Pollution Exclusion.”

Technichem, Inc. (“Technichem”) was sued by the California Department of Toxic Substances Control (“DTSC”) and the owners of a property on which Technichem’s dry cleaning waste disposal warehouse operates, because the property was allegedly contaminated with perchloroethylene (“PCE”).  Various Technichem insurers sued Technichem seeking to limit or avoid their duty to defend Technichem.

With respect to the first issue, Technichem sought summary judgment that the insurers who issued its Business Auto Policies – Zurich America and American Guarantee – had a duty to defend Technichem against the PCE claims.  The court held that the insurers have a duty to defend, because there was a potential for coverage under the Business Auto Policies.  Those policies covered “all sums an ‘insured’ legally must pay as damages because of … ‘property damage’ to which this insurance applies, caused by an ‘accident’ and resulting from the ownership, maintenance or use of a covered ‘auto.’”  The allegations in the DTSC complaint alleged that “’Technichem transported hazardous substances to the Technichem facility’, where “’hazardous substances were released to the environment.’”  Based on this allegation, the court held:  “it’s easy to conceive of a theory under which, for example, PCE was spilled while being unloaded from covered automobiles that transported it to the Technichem site.”  In fact, the court cited extrinsic evidence confirming this theory:  “Test results ‘suggest that a release of [PCE] likely occurred near the loading dock … a location ‘where trucks deliver and offload drums and containers of solvents,’ which could be expected to cause ‘some spillage of PCE.’”

With respect to the second issue, Technichem’s Environmental Impairment Liability Policy (“EIL Policy”) insurer, Steadfast Insurance Company (“Steadfast”), argued that the defense costs it was incurring eroded the limits of the EIL Policy, as compared to the costs of defense being in addition to limits.  The court rejected Steadfast’s argument because, under California regulatory law, defense costs for pollution claims are in addition to limits “in the event of ‘sudden accidental occurrences.’”  The court held that, in the DTSC action, “DTSC has not sought to prove how and when the PCE release occurred….”  Consequently, “[i]t’s certainly possible that the release was gradual and knowing – but it’s also possible …that the release was sudden and accidental.”  Because there was “a bare ‘potential’ or ‘possibility’ of coverage,” the court held Steadfast’s duty to defend was triggered.

Finally, with respect to the third issue, Technichem’s CGL insurer, Zurich America, argued that it had no duty to defend Technichem based on the “Total Pollution Exclusion” contained in the policies.  The court agreed with Zurich America:  “The plain language of the policies’ Total Pollution Exclusion – which bars coverage for claims ‘which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time’ – means there’s no possibility that those policies apply to claims based on the alleged release of PCE.”  American Guarantee & Liability Ins. Co. v. Technichem, Inc., No. 15-cv-03611 (N.D. Ca. June 3, 2016)