Unpublished Disposition, 908 F.2d 976 (9th Cir. 1988)

No. 89-55082.

United States Court of Appeals, Ninth Circuit.

Before GOODWIN, Chief Judge, TANG, Circuit Judge, and MARQUEZ, District Judge.^* 

MEMORANDUM^** 

Ascon Properties, Inc. (Ascon) appeals from an adverse summary judgment in its action for a declaration that Illinois Union Insurance Company (Illinois Union) is obligated under two insurance policies to defend and indemnify Ascon in connection with potential liabilities arising from its ownership of the Ascon Landfill, a declared hazardous waste site. We affirm.

Ascon, a California corporation, was incorporated in 1983 to purchase a 37-acre parcel of real property in Huntington Beach, California, (the "Landfill"), and develop the site into an apartment and shopping complex. Philip Spiller, Ascon's president and sole shareholder, was aware that from 1938 to 1972, the property was used as a disposal site for industrial and oil field operation wastes. Accordingly, on June 23, 1983, Ascon engaged Connexx Oil Company (Connexx) to remove oil from the surface of the Landfill. In addition, Ascon hired Bechtel Power Corporation (Bechtel) to investigate and report on the nature of the wastes deposited at the Landfill.

The Bechtel report concluded that the property contained hazardous wastes which could be removed at a cost of $5.5 to 15.4 million. The report predicted, however, that it was unlikely the California Department of Health Services ("DHS") would declare the Landfill a hazardous waste site. With this knowledge, Ascon purchased the property on July 15, 1983.¹ 

Events did not turn out as Ascon planned. On August 15, 1983, the city of Huntington Beach filed an action against Ascon and Connexx, alleging that the Landfill contains hazardous and toxic wastes which pose a "potential health danger of unknown magnitude" and that the existence of the Landfill imposes "indecent and offensive amounts of dust, noise and odor upon the entire surrounding community." City of Huntington Beach v. Ascon Properties, Inc., et al., No. 40-97-28 (Cal.Super., Orange Cty.). A month later, the Huntington Beach City Council issued a moratorium on waste removal operations at the Landfill. And on January 10, 1984, the Landfill was declared a hazardous waste site by the California DHS.

Prior to the Huntington Beach law suit and DHS's declaration, Illinois Union issued a comprehensive general liability ("CGL") insurance policy to Connexx (the "Connexx policy"). The policy, which was effective from July 12, 1983 to July 12, 1984, named Ascon as an additional insured under the following terms:

It is understood and agreed that [Ascon] is added as an Additional Insured but only as respects the operations of the Named Insured except that liability resulting from the Additional Insured's Sole Negligence.

Following the Huntington Beach suit and DHS's declaration, Illinois Union also issued a CGL policy directly to Ascon (the "Ascon policy"). This policy covered the period from January 18, 1984 to January 18, 1985.

After the issuance of both policies, the DHS demanded that Ascon take remedial action to clean up the site. Under a threat of treble damages, Ascon prepared a Final Site Characterization and a Remedial Action/Mitigation Plan. Ascon then filed suit in federal court against various oil companies alleging, that they were responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. § 9607(a) and the Resource Conservation Recovery Act (RCRA), 42 U.S.C. § 6972(a). Following the district court's dismissal for failure to state a claim and lack of subject matter jurisdiction, the case reached this court in Ascon Properties, Inc. v. Mobil Oil Corp., 866 F.2d 1149 (9th Cir. 1989). We reversed the dismissal of the CERCLA claim and remanded the issue to the district court; the dismissal of the RCRA claim was affirmed.² 

Two years later, the South Coast Air Quality Management District ("SCAQMD") sued Ascon for several million dollars, alleging violations of air quality standards. See People of the State of California ex rel. South Coast Air Quality Management District v. Ascon Properties, Inc., et al., OCSC No. 53-73-46.

On July 8, 1987, Ascon tendered the following claims to Illinois Union and requested coverage for: (1) monies expended in developing and pursuing remedial action and investigating and characterizing wastes on the site as required by the DHS; (2) expenses incurred in pursuing its claims against the oil companies; and (3) expenses incurred in defending the cross-complaints in the state court action. Under separate cover, Ascon also sought coverage for expenses incurred in defending the SCAQMD action.

Illinois Union denied coverage of all claims, and on March 11, 1988, Ascon commenced this diversity action, seeking a declaration that Illinois Union is obligated to defend and indemnify Ascon in connection with its potential liabilities arising from the Landfill. On cross motions for summary judgment the district court ruled in favor of Illinois Union.

The district court found as a matter of law that because "any pollution-related losses in connection with the Ascon Landfill were already a 'known risk,' and not an 'unknown' or 'contingent' event, by the time Illinois Union insured Ascon," its demands for coverage were precluded by California law. It also concluded, as a matter of law, that Illinois Union was correct in denying coverage under the Connexx policy because the liabilities at issue did not arise from the operations of Connexx, as required by the additional insured provision of the policy.

In its motion for summary judgment, Illinois Union asserted other grounds upon which the court did not rely in granting Illinois Union's motion. Most importantly, Illinois Union asserted that Ascon's claims for coverage were precluded by a pollution exclusion found in both insurance policies. Because we find that summary judgment to Illinois Union as to its duties under the Ascon policy can be affirmed on the basis of the pollution exclusion we need not address the other grounds raised by Illinois Union and relied upon by the district court. See Swenson v. United States Postal Service, 890 F.2d 1075, 1077 n. 1 (9th Cir. 1989) (appeals court may consider any ground supported in the record, even where that ground is not the basis for the district court's legal conclusions). With respect to Illinois Union's duties under the Connexx policy, we agree with the district court that the policy is inapplicable to most of Ascon's claims. To the extent that it may be applicable, the pollution exclusion precludes coverage.

I. THE ASCON POLICY.

The Ascon policy contains two different pollution exclusions: one in the standard printed contract, and the other in a separate endorsement. The standard exclusion states that the insurance does not apply:

to bodily injury or property damage arising out of discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such dispersal, release or escape is sudden and accidental.

The pollution exclusion in the separate endorsement is identical to the standard exclusion, except that it deletes the words "or upon land" and does not exclude the exception for "sudden and accidental" dispersals, releases or escapes. Ascon counsels us to apply the standard exclusion. Illinois Union refers us to the endorsement. We look to California law for direction. See James B. Lansing Sound, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 801 F.2d 1560, 1564 (9th Cir. 1986).

The California Supreme Court held in Narver v. California State Life Ins. Co., 211 Cal. 176, 181, 294 P. 393 (1930), that " [e]ndorsements on an insurance policy form a part of the insurance contract, and the policy of insurance with the endorsements and riders thereon must be construed together as a whole." (citations omitted). At the bottom of the pollution endorsement it states: "Nothing herein contained shall be held to vary, alter, waive or extend any of the terms, conditions, or limitations of the policy to which this endorsement is attached other than as above stated." The language is clear, that the endorsement itself can vary, alter and waive the terms of the contract. See Certain Underwriters v. Engs Motor Truck Co., 135 Cal. App. 3d 831, 835, 185 Cal. Rptr. 613, 614 (Cal.App. 1 Dist.1982) (faced with identical language in an insurance policy endorsement, court held that such language clearly dictates that the endorsement can specifically alter the contract). If there is a conflict in meaning between an endorsement and the insurance contract, California law holds that the endorsement controls. See Continental Cas. Co. v. Phoenix Constr. Co., 46 Cal. 2d 423, 431, 296 P.2d 801, 805 (1956); Certain Underwriters, 135 Cal. App. 3d at 835, 185 Cal. Rptr. at 614; Cal.Civil Code Ann. Sec. 1651 (West 1985). We therefore apply the endorsement's pollution exclusion.

Ascon claims that this pollution exclusion is ambiguous and should be construed in its favor. California courts construe ambiguous language in insurance policies in favor of the insured. Reserve Ins. Co. v. Pisciotta, 30 Cal. 3d 800, 807, 180 Cal. Rptr. 628, 631-32, 649 P.2d 764, 767-68 (1982). Standard pollution exclusions are routinely deemed ambiguous and rejected by the courts. See 39 A.L.R.4th 1047 (1985) (discussing the construction and application of pollution exclusion clauses); Abraham, Environmental Liability and the Limits of Insurance, 88 Colum. L. Rev. 942, 961-66 (1988) (same). Courts that reject these exclusions, however, focus on the ambiguities of the "sudden and accidental" exception to the exclusion. The endorsement at issue here does not contain that provision. We therefore conclude that, if faced with this issue, the California Supreme Court would find this exclusion unambiguous.

We also conclude that the California Supreme Court would find that this absolute pollution exclusion precludes coverage for Ascon. All of the claims tendered to Illinois Union stem from alleged dispersals of pollutants into the air, water course or body of water. Ascon's Remedial Action/Mitigation Plan, prepared in response to the DHS-directed clean up, states that the Landfill poses a potential hazard to public health through the release/migration of wastes via air, surface water and ground water. The SCAQMD suit also seeks damages for violations of air quality regulations. The pollution exclusion unambiguously precludes coverage.

Ascon contends that even if the pollution exclusion excludes coverage, Illinois Union has an independent duty to defend the DHS and SCAQMD claims. Under California law, the insurer's duty to defend is broader than its duty to indemnify. See Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 272-73, 54 Cal. Rptr. 104, 111, 419 P.2d 168, 177-78 (1966). However, the insurer's obligation "is limited by the language of the insurance contract itself." St. Paul Mercury Ins. v. Medical Lab. Network, 690 F. Supp. 901, 903 (C.D. Cal. 1988). Where there is no potential for liability under a policy exclusion, there is no duty to defend. See Allstate Ins. Co. v. Gilbert, 852 F.2d 449, 453-54 (9th Cir. 1988) (applying California law); Hydro System, Inc. v. Continental Ins. Co., 717 F. Supp. 700, 703 (C.D. Cal. 1989). Illinois Union has no duty to defend Ascon.

The Connexx policy is equally inapplicable to this dispute and Illinois Union is not obligated to defend or indemnify Ascon under this policy. As quoted previously, the additional insured provision in the Connexx policy provides coverage to Ascon "only as respects the operation of" Connexx. There is no evidence in the record that the DHS-directed clean up or SCAQMD complaint are based in any manner on operations by Connexx.³ 

Illinois Union is not required to indemnify or defend Ascon under either insurance policy for legal and other costs incurred from the DHS-directed clean up or the SCAQMD suit. Summary judgment to Illinois Union is AFFIRMED.