A wastewater treatment plant (WWTP) operated a trucking unit that transported wastewater. The business that owned the facility and trucking unit applied for insurance coverage. In their insurance application and related correspondence, the business represented that they did not accept, process, transport, or discharge hazardous waste. The insurance company issued a $2 million “Primary Environmental Liability Policy” and a $5 million umbrella policy. The policy covered “environmental damage” or “emergency response expenses” arising out of a “pollution incident.” The policy 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, a vacuum truck exploded at the WWTP when a truck driver mixed wastewater with a chemical (sodium chlorite). Chemical spillage from the explosion spontaneously combusted and caused a fire. The business submitted a claim to cover the cleanup costs. The insurance company did not pay the claim.

The parties entered mediation and reached a partial settlement including a “Payment Term Sheet.” The Payment Term Sheet provided that the insurance company would pay $2.5 million, but if the insurance company obtained a judgment that it was not obligated to pay for the damages under its policy, then the business would reimburse the insurance company. The insurance company paid the $2.5 million.

The business sued the insurance company for failing to pay damages up to the policy limit. The insurance company filed a first amended cross-complaint against the business for declaratory relief, reimbursement of defense costs and expenses, unjust enrichment, fraud, rescission, and unlawful business practices.

The insurance company filed applications for a right to attach order and writ of attachment against both the WWTP and Trucking Unit 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, the insurance company presented evidence showing that the intentional noncompliance policy exclusion applied because the business(s) violated laws and regulations when they stored and concealed the presence of sodium chlorite at the facility. The insurance company also presented evidence showing that the policy should be rescinded because the business(s) misrepresented that they did not accept, process, transport, or discharge hazardous waste.

A three-judge panel of California’s Second Appellate District unanimously affirmed a lower court ruling that held the insurance company was within its rights when it withheld $2.5 million in a payout.

“All that [the insurance company] had to establish was the probability that their policy did not cover the damages,” wrote Justice Martin Tangeman on behalf of the panel in a 12-page opinion. “[The insurance company] did so by showing that the 11 noncompliance policy exclusion applied and that [the business(s)] misrepresented and concealed material facts.”

 

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