Reported / Citable
Background
The County of San Bernardino owns the Chino Airport. The site has a long industrial history. The federal government leased and operated parts of the airport during World War II, melting surplus aircraft into ingots and discharging waste into the ground. In the 1960s and 1970s, tenants produced napalm and other incendiary devices on site. By 1990, the California Regional Water Quality Control Board found high levels of trichloroethylene in nearby drinking water and issued cleanup and abatement orders to the County. The County eventually incurred substantial costs remediating the contamination.
The County turned to its excess liability insurance policies issued by the Insurance Company of the State of Pennsylvania (ICSOP). Each policy provided a $9 million limit, but the parties disputed whether that limit applied per occurrence (the County’s position) or per year in the aggregate (ICSOP’s position). The difference matters enormously: depending on how many policy years and occurrences are involved, the per-occurrence reading could yield substantially more coverage than the annual aggregate reading.
The U.S. District Court for the Central District of California sided with ICSOP, reading the policies’ aggregate limits provision as controlling and dismissing the County’s declaratory relief claim. The County appealed.
The Court’s Holding
The Ninth Circuit reversed. Applying California law, the panel held that ICSOP’s annual aggregate limits provision does not apply to the County’s property damage claim. The aggregate limits provision was at best ambiguous as to whether it constrained property-damage coverage at all.
Under California contract-interpretation rules, an insurance policy is read in light of its plain language. If the language is ambiguous (capable of more than one reasonable meaning), the court may consider extrinsic evidence about how the parties understood the terms. If the policy remains ambiguous after that analysis, ambiguities are construed against the insurer (the drafter) and in favor of coverage.
The panel went through that analysis here. It held that the aggregate limits provision was ambiguous: a reasonable insured could read it as applying only to certain coverages (such as bodily injury in some lines) but not to property damage. The panel then considered extrinsic evidence about industry practice and the policies’ history. That evidence reinforced rather than dispelled the ambiguity. Because the aggregate limits provision was ambiguous and could not be read as the only reasonable interpretation, the court concluded that the policies did not specify an aggregate limit for property damage.
The court also addressed the State Court of Appeal’s decision in Garamendi v. Mission Insurance Co., 31 Cal. Rptr. 3d 395 (Cal. Ct. App. 2005), and held that Garamendi did not bind the panel’s decision on the policy language at issue here. With the aggregate limits provision out of the picture for property damage, the County’s coverage claim for the Chino Airport remediation looks substantially different from how the district court viewed it. The case was remanded for reconsideration of the County’s declaratory relief request in light of the panel’s ruling.
Key Takeaways
- California courts (and federal courts applying California law) will not read an aggregate limit into an insurance policy where the operative language is genuinely ambiguous about its scope.
- The two-step analysis is unchanged: start with the language, consider extrinsic evidence if there is ambiguity, and resolve any remaining ambiguity against the insurer.
- The state Court of Appeal’s decision in Garamendi v. Mission Insurance Co. does not automatically govern other policies with different language. Each policy must be analyzed on its own terms.
- The decision can substantially expand recoverable amounts in long-tail environmental coverage cases, because per-occurrence limits combined with multiple policy years can dwarf aggregate caps.
Why It Matters
California is one of the most active forums in the country for environmental insurance coverage disputes. Many large environmental liabilities — including contamination at military and aerospace sites, oil and gas operations, and industrial facilities — were insured under policies issued decades ago. The interpretation of per-occurrence versus aggregate limits in those policies often determines whether insurers will pay nine-figure cleanup costs or far smaller sums.
For policyholders, the decision is a significant win. It confirms that insurers cannot rely on a generic “aggregate limits” provision to cap property damage coverage if the policy language is ambiguous about whether that cap applies. Public entities like the County of San Bernardino, which owns numerous legacy industrial sites, will benefit. So will private policyholders defending environmental and similar long-tail claims.
For insurers, the decision is a reminder that ambiguity in policy drafting can be expensive. Going forward, ICSOP and other carriers will need to be more explicit about how aggregate caps apply, particularly to property-damage coverage in environmental and long-tail contexts.