California Supreme Court Creates Exception to the Foster-Gardner Rule in Ameron

The California Supreme Court has issued a landmark decision that provides a new standard in analyzing whether an insurer’s duty to defend is triggered under a policy of insurance whereby the term “suit” is not defined and, in the process, has expanded insurers’ potential defense obligation. The new case, Ameron International Corp. v. Insurance Company of the State of Pennsylvania et al., Case No. S153852, created an exception to the Foster-Gardner rule that the undefined term “suit” is strictly read to mean an action in a court of law. The Ameron Court held that quasi-judicial adjudicative proceedings also will be deemed a “suit” under a policy of insurance that does not define the term “suit.”

The Foster-Gardner Rule

A decade ago, the California Supreme Court handed down its decision in Foster-Gardner, Inc. v. National Union Fire Ins. Co. of Pittsburg et al. (1998) 18 Cal.4th 857. Foster-Gardner found that the undefined term “suit” contained in a standard comprehensive general liability (CGL) policy meant “an actual court proceeding initiated by the filing of a complaint.” In so ruling, the Court adopted a strict bright-line test expressly eschewing the “functional equivalent” test, wherein a “suit” also could mean other civil proceedings not pending in a court of law but that function in similar ways. The Court determined that the word “suit” is unambiguously and traditionally well-recognized to mean an action in a court of law. In examining the terms of the CGL policy, the Court found that “the unambiguous language of the policies obligated the insurers to defend a ‘suit,’ not … the ‘substantive equivalent’ of a ‘suit.’”

The California Supreme Court has affirmed the Foster-Gardner rule in subsequent cases — most notably in Certain Underwriters at Lloyd’s of London v. Superior Court (Powerine I) (2001) Cal.4th 945, whereby the Supreme Court held that an insurer’s duty to defend is limited to sums wherein the insured was “legally obligated to pay as damages” by a court of law. Much like Foster-Gardner, the policy at issue in Powerine I did not define the terms “suit” or “damages.” In determining the meaning of “damages,” the Court once again focused on the intent of the contracting parties and the plain meaning of the words, rather than rewriting contracts to change with every new administrative proceeding made available. Following this framework for interpreting insurance policies, the Court found that the plain meaning and intent of the policy was to exclude from “damages” any type of recovery except a financial award by a court. In doing so, the Court reaffirmed the reasoning in Foster-Gardner that a “suit” must be a civil action prosecuted in court.

Ameron: The Exception to the Foster-Gardner Rule

In Ameron, the Supreme Court opened up the term “suit” to include certain administrative proceedings. Ameron International Corporation (Ameron) was a subcontractor for Peter Kiewit Son’s Company (Kiewit), which in turn contracted with the U.S. Department of the Interior’s Bureau of Reclamation (Bureau) for the fabrication and installation of concrete siphons used in the Central Arizona Project aqueduct. Ameron manufactured the siphons used in the project. The siphons turned out to be defective, which eventually led to a proceeding before the U.S. Department of the Interior’s Board of Contract Appeals (IBCA) following an adverse ruling of the Bureau against Ameron. The IBCA proceeding lasted for 22 days of hearings, dealt with contested factual issues, was heard by an administrative law judge, and involved questioning of witnesses. Ameron tendered the claim to its insurers for defense and indemnity. The insurers, specifically those whose policies do not define the term “suit,” denied Ameron’s tender, claiming that under Foster-Gardner, the IBCA proceeding is not a “suit” and, therefore, there is no duty to either defend or indemnify Ameron. Ameron commenced an action against its insurers in the California Superior Court, which dismissed Ameron’s complaint following the sustaining of the insurers’ demurrer. Ameron appealed, and the Court of Appeal affirmed the trial court’s judgment in favor of the insurers, “reluctantly applying Foster-Gardner’s reasoning to those policies that did not define the term ‘suit’” because the IBCA proceeding was an adjudicative administrative hearing before a federal administrative agency, rather than a court of law. The California Supreme Court granted Ameron’s petition for review.

In holding that the subject IBCA proceeding should be considered a “suit” under the policies that do not expressly define the term, the California Supreme Court said that Foster-Gardner’s rule does not apply in the case. In so holding, the Court found significant and dispositive to its analysis the following:

• A pollution remediation order by a government agency, such as the one involved in Foster-Gardner, is significantly different from a quasi-judicial adjudicative proceeding, in that the former could not be considered a “suit” even under a reasonable insured expectation standard, while the latter is a “suit” as a reasonable insured would understand the term.
• The IBCA proceeding is a statutory creation, which requires many of the same procedural requirements as a normal action in a court of law. Specifically, IBCA proceedings require the filing of a notice and “complaint” much in the same manner and form as a traditional complaint filed in a court of law. The Court found it significant that the pleading requirements in IBCA proceedings are consistent with, and meet the standards of, California’s Code of Civil Procedure.
• IBCA proceedings are akin to court proceedings in that witnesses testify under oath and are subject to cross-examination by the opposing side, and all evidence presented is subject generally to the federal rules of evidence. Moreover, the subject IBCA proceeding lasted 22 days, involved the examination and cross-examination of numerous witnesses, and involved submission of substantial evidence.
• IBCA proceedings are litigated before an administrative law judge, who has similar powers as a traditional trial judge, and who can grant “the same relief that would be available to a litigant asserting a contract claim in the Court of Federal Claims.”
• The legislative purpose of IBCA proceedings provides that contractors have their “day in court.”

After describing these dispositive factors, the Court reasoned that given the nature of the subject quasi-judicial adjudicative IBCA proceeding, a reasonable insured would expect it to fall within the word “suit” under the subject policies and, therefore, would expect that the policies would provide coverage. Given that Ameron apparently had a choice of pursuing the case either through the IBCA proceeding or through the Court of Federal Claims, the Ameron Court noted that Ameron would not have chosen to take the IBCA proceeding path had it anticipated that the IBCA proceeding would not be covered while the same claim litigated in the Court of Federal Claims would be covered under the subject policies.

The California Supreme Court’s decision in Ameron has effectively created a second rule — an exception to Foster-Gardner — in situations where the insurance policy at issue does not define the word “suit.” The California Supreme Court made it clear that the Foster-Gardner rule is still good law, except that Ameron creates an explicit exception by looking at the specifics of the forum and manner in which the underlying claim is being resolved. Under Ameron, the term “suit” in policies that have no express definition for the term now has, at least, two meanings. First, “suit” is any action in a court of law under Foster-Gardner. Second, “suit” also means any quasi-judicial or administrative adjudicative proceedings that are conducted under similar circumstances and procedures as a traditional civil suit.

The Impact of Ameron

The Ameron case expands the potential obligations of insurers concerning the duty to defend and/or duty to indemnify. Prior to Ameron, insurers for policies that do not have an express definition of the term “suit” could have declined to defend an insured against administrative proceedings, quasi-judicial adjudicative proceedings, or other proceedings that were not being litigated in a traditional court of law. Ameron effectively modifies the Foster-Gardner rule in that insurers’ obligations also may now be triggered when the claim against the insured is pending before an administrative agency that is sufficiently adjudicative such that the proceedings look more like a traditional court litigation, except for the forum in which the matter is being litigated.

On one hand, the California Supreme Court’s decision in Ameron is not entirely surprising given the nature and scope of the IBCA proceeding involved in the case. The IBCA proceeding operated much like a civil trial. The main difference was the forum where the proceeding was held. Moreover, while the presiding officer in the IBCA proceeding is an administrative law judge, the powers of the administrative law judge were truly akin to those of an ordinary court judge. However, insurers now face a more challenging determination regarding defense and indemnity as to cases involving other quasi-judicial or administrative proceedings that, while contentious, may not necessarily operate like a traditional trial in a court of law, or that do not have the same “complaint” requirements similar to California’s Code of Civil Procedure. In such circumstances, insurers should consider how similar such proceedings are to civil litigation and, if there are apparent parallels, should consider providing at least a defense to an insured under a reservation of rights.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Eileen Ridley
Partner
San Francisco, California
415.438.6469
[email protected]

Patrick Wong
Associate
San Francisco, California
415.984.9891
[email protected]