Judge David S. Cunningham, Case Number: 19STCV09517, Date: 2024-02-23 Tentative Ruling

Judge: David S. Cunningham, Case: 19STCV09517, Date: 2024-02-23 Tentative Ruling

Moving Party: Hartford Accident and Indemnity Co., et al. (collectively “Insurers” or “Defendants”)

Defendants’ motion to lift stay is denied as to Defendants’ first argument (no overlap because the Shell claims have been adjudicated), second argument (no overlap as to “occurrence” and “occurrences”), third argument (no overlap as to “property damage”), and fourth argument (no overlap as to the pollution exclusions).

Defendants’ fifth argument (no overlap as to the contribution claims) will be decided at the hearing.

The underlying action (BC544786) concerns toxic cleanup at a site in Carson, California. Barclay’s predecessor purchased the site from Shell Oil Company (“Shell”) in the 1960s and turned it into a residential neighborhood. Years later, the Los Angeles Regional Water Quality Control Board (“Water Board”) ordered Shell and Barclay to cleanup and abate contamination at the site.[1] Shell then proceeded to remediate the area without Barclay’s help. Eventually, Shell sued Barclay for indemnification and contribution. Following a three-week trial, the jury found Barclay responsible for 50% of the cleanup costs, and the Court entered judgment. The matter is now on appeal.

The instant case (19STCV09517) is related to the Shell action. It is a coverage action filed by Barclay against several insurance companies. Barclay alleges that the insurance companies’ policies cover Barclay’s liabilities in the Shell action, asserting causes of action for breach of contract, breach of the implied covenant, and declaratory relief. On October 7, 2020, Judge Elihu Berle stayed the case.

In Montrose Chemical Corp. v. Superior Court (1994) 25 Cal.App.4^th 902, 31 Cal.Rptr.2d 38 (“Montrose II”), the court, relying upon the principles set out in Montrose I, stated: “(1) since the duty to defend is broader than the duty to indemnify and (2) since an insurer may owe a duty to defend in an action in which coverage is in doubt and ultimately does not develop, it follows that (3) the duty to defend is a continuing one which arises on the tender of defense and (4) lasts until (a) the underlying lawsuit is resolved or (b) the coverage issue can be determined without prejudice to the insured.” [Citation.]

In Montrose I, the Supreme Court summarized the general principles which are to be applied when a declaratory relief action is brought to determine coverage issues while the underlying claim on which the coverage dispute centers is still pending. “To eliminate the risk of inconsistent factual determinations that could prejudice the insured, a stay of the declaratory relief action pending resolution of the third party suit is appropriate when the coverage question turns on facts to be litigated in the underlying action. [Citation.] For example, when the third party seeks damages on account of the insured's negligence, and the insurer seeks to avoid providing a defense by arguing that its insured harmed the third party by intentional conduct, the potential that the insurer's proof will prejudice its insured in the underlying litigation is obvious. This is the classic situation in which the declaratory relief action should be stayed. By contrast, when the coverage question is logically unrelated to the issues of consequence in the underlying case, the declaratory relief action may properly proceed to judgment.” [Citation.]

There are three concerns which the courts have about the trial of coverage issues which necessarily turn upon the facts to be litigated in the underlying action. First, the insurer, who is supposed to be on the side of the insured and with whom there is a special relationship, effectively attacks its insured and thus gives aid and comfort to the claimant in the underlying suit; second, such a circumstance requires the insured to fight a two-front war, litigating not only with the underlying claimant, but also expending precious resources fighting an insurer over coverage questions—this effectively undercuts one of the primary reasons for purchasing liability insurance; and third, there is a real risk that, if the declaratory relief action proceeds to judgment before the underlying action is resolved, the insured could be collaterally estopped to contest issues in the latter by the results in the former. It is only where there is no potential conflict between the trial of the coverage dispute and the underlying action that an insurer can obtain an early trial date and resolution of its claim that coverage does not exist. [Citation.]

(Haskel, supra, 33 Cal.App.4^th at 978-979, underlined case names added, footnotes omitted, emphasis in original.)

Great American Insurance Co. v. Superior Court (2009) 178 Cal.App.4^th 221:

When a declaratory relief action regarding the duty to defend depends on coverage issues, it may be that the resolution of those issues might prejudice the insured in the underlying litigation. “For example, when the third party seeks damages on account of the insured's negligence, and the insurer seeks to avoid providing a defense by arguing that its insured harmed the third party by intentional conduct, the potential that the insurer's proof will prejudice its insured in the underlying litigation is obvious.” [Citation.] Under those circumstances, the proper course of action is to stay the declaratory relief action until resolution of the underlying action. [Citation.] However, if the declaratory relief action can be resolved without prejudice to the insured in the underlying action—by means of undisputed facts, issues of law, or factual issues unrelated to the issues in the underlying action—the declaratory relief action need not be stayed. [Citation.]

A court considering whether to stay a declaratory relief action must therefore consider precisely which issues are to be litigated in order to resolve the declaratory relief action, and whether those issues are related to factual issues yet to be litigated in the underlying action. [Citation.] If the factual issues to be resolved in the declaratory relief action overlap with issues to be resolved in the underlying litigation, the trial court must stay the declaratory relief action. If there is no such factual overlap and the declaratory relief action can be resolved on legal issues or factual issues unrelated to the issues in the underlying action, the question as to whether to stay the declaratory relief action is a matter entrusted to the trial court's discretion.

In exercising such discretion, however, the trial court should consider the possibility of prejudice to both parties. Case law has identified three types of potential prejudice to an insured. As we will explain, however, two of these types of prejudice are simply the prejudice which arises when there is factual overlap with the issues in the underlying action. First, an insured may be prejudiced if the insurer “join[s] forces with the plaintiffs in the underlying action[ ] as a means to defeat coverage.” [Citation.] This type of prejudice would arise in the hypothetical discussed earlier, where an insurer attempts to avoid coverage by arguing that its insured harmed the third party by intentional conduct—proof of which would obviously be of great assistance to the third party in the underlying action. Clearly, this type of prejudice arises only in cases of factual overlap. If the factual issues in the declaratory relief action do not overlap with factual issues in the underlying action, there is no issue on which the insurer can align with the third-party plaintiff.

“[A second] sort of prejudice occurs when the insured is compelled to fight a two-front war, doing battle with the plaintiffs in the third party litigation while at the same time devoting its money and its human resources to litigating coverage issues with its carriers.” [Citation.] This type of prejudice does not depend on the existence of factual overlap with the underlying action, and will, in fact, be an issue for the trial court to consider every time an insured seeks to stay a declaratory relief action while the underlying action is still pending.

“[Thirdly], there is the collateral estoppel issue. If the declaratory relief action is tried before the underlying litigation is concluded, the insured may be collaterally estopped from relitigating any adverse factual findings in the third party action, notwithstanding that any fact found in the insured's favor could not be used to its advantage.” [Citation.] This third type of prejudice, like the first, clearly depends upon factual overlap with the underlying action.

As already noted, the court must also consider possible prejudice to the insurer that may be caused by staying the declaratory relief action. In such event, the insurer would be required to continue to pay defense costs until the declaratory relief action is resolved. If the insurer is correct and, in fact, it has no further duty to defend, it may nevertheless be required to keep paying defense costs indefinitely while the declaratory relief action is stayed. “For this reason, the trial court should not hesitate to fashion orders which attempt to balance these conflicting concerns.” [Citation.]

In sum, in a case in which there is no factual overlap with the issues to be resolved in the underlying case, the trial court must exercise its discretion on a motion for stay, balancing the insured's interest in not fighting a two-front war against the insurer's interest in not being required to continue paying defense costs which it may not owe and likely will not be able to recoup. These competing interests will be circumstance-specific, depending, inter alia, on such factors as the anticipated duration of the underlying litigation, whether the insured has separate counsel in the two actions, and the availability of other insurance to cover the costs of defense.

Judge Berle issued a mandatory stay (See, e.g., 10/7/20 Order on Barclay Hollander Corporation’s Motion to Stay Action, pp. 5-6), so, to lift the stay, Defendants need to show that a mandatory stay is no longer necessary. Under California law, a coverage action must be stayed “pending resolution of the underlying action when the coverage question turns on facts to be litigated there.” Croskey, et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group August 2023 Update) ¶ 15:164.) The primary question is whether the factual issues overlap. (See Great American, supra, 178 Cal.App.4^th at 235 [instructing that, “[i]f the factual issues to be resolved in the declaratory relief action overlap with issues to be resolved in the underlying litigation, the trial court must stay the declaratory relief action”], emphasis in original.)

Defendants make five arguments. First, in general, they claim the stay should be lifted because the Shell claims have been adjudicated. (See Motion, p. 10; see also Reply, pp. 3-6.)

The Court disagrees. As Barclay points out, Shell is pending and unresolved “until its final determination upon appeal, or until the time of appeal, unless the judgment is sooner satisfied.” (Opposition, p. 12, emphasis deleted.) The Court of Appeal could reverse the Shell judgment and remand for a new trial; therefore, generally speaking, the factual issues remain alive.

Second, Defendants contend there is no overlap as to (1) whether an “occurrence” happened, and (2) how many “occurrences” occurred. (See Motion, pp. 12-14; see also Reply, pp. 7-8.)

The Court disagrees. If deciding the “occurrence” and “occurrences” issues were just an exercise of reviewing the allegations in the Shell complaint, Defendants’ argument probably would be persuasive. Defendants admit, though, that their position is also based on “the facts set forth in the Water Board’s RCAO and subsequent court rulings[.]” (Motion, p. 12.) Indeed, Defendants concede that their position rests on the notion that these facts “were already adjudicated[.]” (Ibid., emphasis in original.) The concession undermines their argument. Collateral estoppel was a recurring issue in Shell. Multiple motions were filed in which the parties asked the Court to determine whether the Water Board’s findings, Judge Amy Hogue’s findings, and the findings in the Court of Appeal’s pre-trial opinion had to be treated as true due to collateral estoppel. Barclay consistently argued that collateral estoppel did not apply and that those findings should be tried anew at trial. While the Court found collateral estoppel applicable (see, e.g., 2/10/23 Shell Order Re: Motion for New Trial, pp. 7-11), Barclay is challenging the finding on appeal. (See, e.g., Reply, p. 5 [acknowledging that Barclay is appealing “this Court’s ruling” that the “factual findings s have previously been adjudicated and established and are binding on Barclay”].) The fallout, if the Court of Appeal reverses, is that the facts might need to be relitigated. For the time being, the overlap appears to endure.[2]

Third, Defendants contend there is no overlap as to whether “property damage” occurred during the policy periods. (See Motion, p. 14.)

In the Shell trial, Barclay sought to present expert testimony regarding how contaminants at the Kast site moved through soil over time. However, the Court ruled that evidence inadmissible. [Citation.] The decision to exclude that expert testimony is now part of the Shell appeal. In other words, the issue of when various parts of the Kast site suffered property damage is at issue both in the Shell lawsuit and this coverage case. Thus, the stay should remain in effect as to this issue. [Citations.]

Moreover, the Insurers appear to be relying on the Court’s exclusion of the expert evidence to argue that there is only one time period when “property damage” occurred: when Lomita actively developed the Kast site. However, because the issue of whether Barclay’s expert’s testimony that the property damage occurred in several ways over a much longer time period should have been presented to the jury in the underlying case will be at issue in the Shell appeal, the Insurers’ argument must wait for a final adjudication on the issue. Otherwise, it is likely that Barclay arguably would not be able to present all of its evidence, which would be unfair if the order excluding that evidence ultimately is overturned in the Shell appeal. Such an outcome could undermine the integrity of this Court’s ruling on the Insurers’ argument as a result. Thus, the Insurers again press the Court to open an issue that properly should first be decided fully and finally in the litigation with Shell, not in this coverage case.

The Court agrees with Barclay. The excluded expert evidence bears some relation to the factual question of when the property damage took place, and collateral estoppel factored into the Court’s exclusion ruling. A reversal is possible. If the Court of Appeal overturns the exclusion ruling and/or finds collateral estoppel inapplicable, the Court could be ordered to admit the expert testimony and to retry the factual issue. Enough overlap persists to support maintaining the mandatory stay.

Fourth, Defendants claim there is no overlap as to whether some Insurers’ pollution exclusions bar coverage. (See Motion, pp. 15-16; see also Reply, pp. 8-9.)

These pollution exclusions provide “that the insurance does not apply to personal injury, bodily injury or property damage arising out of the discharge, dispersal, release or escape of . . . contaminants or pollutants . . . but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.” [Citations.] Thus, the Insurers are trying to prove exactly what Barclay is trying to disprove in the Shell lawsuit: that Barclay contributed to the contamination at the Kast site in a manner that was not accidental. Because the Shell appeal centers on claims sounding in equity, issues of knowledge and intent will be key factors in determining how much responsibility for remediating the land Barclay should bear. Therefore, this case must be stayed. [Citation.]

* “The issue to be litigated with respect to the applicability of certain policies’ pollution exclusions . . . is whether the contamination for which Shell sought indemnity was the result of any sudden and accidental discharge, as opposed to gradual seepage over the course of years or intentional placement of the contaminants.” (Motion, p. 15, emphasis added.)

* “The extensive discovery taken and facts adjudicated in the Shell Action and in the Water Board proceeding have made it clear that there was no “sudden and accidental” event that caused the contamination for which Barclay is liable.” (Id. at pp. 15-16, emphasis added.)

As the italicized words demonstrate, Defendants’ argument depends on the assertion that the facts have been finally adjudicated. To repeat, numerous key facts were deemed true and resolved in Shell based on collateral estoppel. A reversal could require the excluded expert testimony to be admitted and the material facts to be retried, particularly facts pertaining to the timeframe of the seepage, knowledge, and intent. The facts continue to overlap.

Fifth, Defendants contend there is no overlap as to the contribution claims against Great American Insurance Company (“Great American”) (the contribution claims were filed by certain insurers with exhausted policies). (See Motion, pp. 11-12; see also Reply, pp. 2-3.)

The Great American policies contain, in all material respects, the same language as that contained in the other Primary Policies. [Citation.] Thus, whether Great American owes Barclay a duty to defend (and therefore must pay contribution to the other Primary Insurers) necessarily relies on the same arguments that Montrose I prohibits from moving forward with respect to the Insurers’ own claims that they should not owe a duty to defend Barclay in the Shell lawsuit. The questions are identical with respect to whether Barclay’s actions constitute an “accident,” which is part of the definition of “occurrence” in all the Primary Insurers’ policies. Whether Barclay acted accidentally is still at issue in the Shell lawsuit—until all avenues for appeal are exhausted—with respect to Shell’s equitable contribution claim. Therefore, this issue must continue to be stayed, along with all the rest.

Again, the applicability of collateral estoppel is an appellate issue. The factual issues might have to be relitigated if the Court of Appeal finds collateral estoppel inapplicable. To the extent the contribution claims necessitate consideration of facts at issue in the appeal, the overlap likely continues.

On the other hand, Defendants assert that the Court would only need to look at the policy language and the Shell complaint to adjudicate the contribution claims (see Reply, p. 2), which, if true, could support a partial lifting of the stay. (See, e.g., Croskey, supra, at ¶¶ 15:170-15:171 [permitting courts to sever and/or bifurcate issues that do not involve overlapping facts].)

The Court wants to discuss this issue with the attorneys and will rule on it during oral arguments.

* The Court is denying Defendants’ motion and keeping the mandatory stay in place as to Defendants’ first, second, third, and fourth arguments.

* Defendants’ fifth argument will be decided at the hearing. If the defense attorneys fail to show that the contribution claims can be resolved solely by considering the policies and the Shell complaint, the Court intends to (1) deny the motion, and (2) maintain the mandatory stay. If the defense attorneys do make the showing, the Court intends to lift the stay.

In light of the preceding analysis, the Court does not need to determine whether the case should be stayed on a discretionary basis. The issue is moot as to Defendants’ first, second, third, and fourth arguments. The mandatory stay should continue.

What about the contribution claims? If defense counsel fail to establish that the contribution claims can be adjudicated by simply reviewing the policies and the Shell complaint, the Court intends to (1) deny the motion, and (2) prolong the mandatory stay. If defense counsel do establish their argument, the Court intends to lift the stay instead of granting a discretionary stay. The reason why is because the contribution claims are claims between insurance companies and, if the showing is made, would not involve evidence and facts of Barclay’s actual conduct.

Because the mandatory stay should stay in place as to Defendants’ first, second, third, and fourth arguments, the Court finds that the prejudice analysis weighs in Barclay’s favor.

Turning to the contribution claims, if the defense attorneys fail to make the showing discussed above, the Court intends to (1) deny the motion, and (2) continue the mandatory stay. The prejudice analysis would weigh in Barclay’s favor in that situation. If the defense attorneys do make the showing, the Court intends to lift the stay. The Court reiterates that the contribution claims are claims between insurance companies and, if the showing is made, would not require the Court to consider evidence and facts of Barclay’s actual conduct. The prejudice to Barclay would be minimal, and the prejudice analysis would weigh in Defendants’ favor.

Defendants alternatively ask the Court to lift the stay for discovery. (See, e.g., Reply, p. 9.)

California law does authorize the Court to permit discovery; nevertheless, “[w]here the insurer seeks discovery from the insured on matters logically related to issues affecting the insured's liability in the underlying action, the court should stay such discovery (or enter a confidentiality order if sufficient to protect the insured's interests).” (Croskey, supra, at ¶ 15:172.)

Given this rule, the Court denies the discovery request as to Defendants’ first, second, third, and fourth arguments.

For the contribution claims, if defense counsel fail to substantiate their argument, the Court intends to (1) deny the motion, (2) retain the mandatory stay, and (3) deny the discovery request. If defense counsel do substantiate their argument, the Court intends to lift the stay. The Court finds that Barclay would suffer little or no prejudice in that scenario, and Defendants would be entitled to conduct discovery.

[1] The Water Board’s order is called the Revised Cleanup and Abatement Order (“RCAO”).

[2] Barclay claims overlap exists because “Barclay could be put in a position to argue that there was potentially more than one ‘occurrence’—essentially, that Barclay’s actions in developing the Kast site possibly caused pollution in more than one way.” (Opposition, p. 14.) Barclay says“[t]his position is directly contrary to the position that Barclay must take in the Shell lawsuit, in which Barclay has always maintained that it had nothing to do with polluting the land (i.e., that there are no ‘occurrences’).” (Ibid., underlined case name added.)

Since overlapping factual issues still exist, the Court agrees with Barclay and finds that Barclay’s argument shows prejudice.