1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 CASA NIDO PARTNERSHIP, Case No. 20-cv-07923-EMC

8 Plaintiff,

ORDER GRANTING IN PART AND

9 v. DENYING IN PART CASA NIDO’S

MOTION FOR PARTIAL SUMMARY

10 JAE KWON, et al., JUDGMENT, AND GRANTING IN

PART AND DENYING IN PART

11 Defendants. SENTRY’S CROSS-MOTION FOR

SUMMARY JUDGMENT

12 Docket Nos. 148, 157 13 14 15 I. INTRODUCTION 16 This is an environmental cleanup case brought by Plaintiff Casa Nido Partnership (“Casa 17 Nido”) against several defendants, including Defendants Catherine O’Hanks (“O’Hanks”) and 18 Sentry Insurance Company (“Sentry”). Casa Nido is the owner of the building in which O’Hanks 19 operated a dry-cleaning business from 1960 to 1992. See Docket No. 147 (“TAC”). Sentry issued 20 an insurance policy to O’Hanks with Casa Nido listed as an “Additional Insured.” Id. Casa Nido 21 alleges O’Hanks, while operating the facility, released Tetrachloroethylene (“PCE”) onto the floor 22 and into the groundwater below the facility, for which Casa Nido spent hundreds of thousands of 23 dollars remediating. Id. Casa Nido alleges it is entitled to indemnification and contribution from 24 O’Hanks under the federal Comprehensive Environmental Response, Compensation, and Liability 25 Act (“CERCLA”). Id. 26 O’Hanks counter-claimed against Casa Nido. See Docket No. 51. In response, Casa Nido 27 sent a Tender of Defense and Indemnity to Sentry, claiming Sentry has a duty to defend Casa Nido 1 determined it has no duty to defend or indemnify. Id.; see also Docket No. 64, Ex. E (“Denial 2 Letter”). 3 Now pending are Casa Nido’s claims for declaratory relief and for partial summary 4 judgment, as well as Sentry’s cross-motion for summary judgment, on three issues: (1) whether 5 Sentry owes a duty to defend against O’Hanks’ cross-claim, (2) whether Sentry’s costs of 6 defending Casa Nido are limited to $100,000 pursuant to the DCE, and (3) whether Sentry’s 7 failure to defend Casa Nido constitutes a breach of the covenant of good faith and fair dealing. 8 See Docket No. 148 (“Casa Nido Mot.”); Docket No. 157 (“Sentry Cross-Mot.”). 9 As set forth below, the Court GRANTS Casa Nido’s motion for partial summary judgment 10 with respect to Sentry’s duty to defend Casa Nido and DENIES Sentry’s cross-motion for 11 summary judgment as to the same. 12 The Court DENIES Casa Nido’s motion for summary judgment with respect to whether 13 Sentry’s costs of defending Casa Nido are limited to $100,000 pursuant to the DCE, and 14 GRANTS Sentry’s cross-motion for summary judgment as to the same. 15 The Court GRANTS Sentry’s cross-motion for summary judgment as to whether its 16 refusal to defend Casa Nido against O’Hanks’ counter-claim constitutes a breach of the covenant 17 of good faith and fair dealing. 18 II. RELEVANT BACKGROUND 19 A. Factual Background 20 In 1976, Casa Nido purchased the real property (the “Property” or “Site”) located at 12210 21 San Pablo Avenue, Richmond, California, and is the current owner to this day. See Docket No. 22 148-1 (Joint Stipulation to Agreed Facts) (“Fact Stip.”) ¶ 5. O’Hanks owned and operated a dry- 23 cleaning facility at the Property from 1960 until 1992. Id. ¶ 8. 24 In August 2016, Casa Nido learned of PCE subsurface contamination at the Property from 25 a Site Assessment Report conducted by Pangea Environmental Services, Inc. (“Pangea”). Id. ¶ 7. 26 Casa Nido stipulates that it “did not know, nor had any reason to know, before 2016, of the 27 existence of the subsurface contamination.” Id. ¶ 8. Casa Nido alleges that due to equipment 1 of PCE . . . during the 32-year period that Defendant O’Hanks operated the dry-cleaning business 2 on the Property . . . and these sudden and accidental spills and overflows resulted in PCE being 3 released.” See TAC ¶ 20. 4 Robert Clark-Riddell, a civil engineer at Pangea, submitted a declaration in support of 5 Casa Nido’s motion stating that in his professional opinion:

6 [T]he risk of PCE spills, leaks, and accidental and sudden releases was significant during the 1960’s, 1970’s, and into the 1980’s and 7 1990’s. This is because PCE usage by US drycleaners peaked in the late 1970s and drycleaning machine technology [] declined 8 significantly by 2000 . . . the risk of PCE spills, leaks, and accidental and sudden releases likely continued into the 1980’s and 1990’s due 9 to gradual implementation of new environmental laws and regulatory oversight. In 1976, the Resource Conservation and 10 Recovery Act (RCRA) was enacted to address public concern about the serious problems related to disposal of hazardous wastes . . . 11 Section 3002 [of the RCRA] required standards for generators of hazardous waste covering record-keeping, reporting, labeling, use of 12 appropriate containers, and a manifest system. 13 Docket No. 168-2 (Declaration of Robert Clark-Riddell) (“RCR Decl.”) ¶ 17. The Contra Costa 14 County Health Services Department, Environmental Health Division (“CCCEHD”) performed 15 inspections of the Site in the 1980’s and 1990’s. See id. ¶ 14. A CCCEHD report from December 16 31, 1984 showed the average PCE waste generation of 25 gallons per month, with spent PCE 17 stored in a 55-gallon container that was picked up by a waste disposal service every two months. 18 Id. The 1984 report stated that no plan of correction was necessary and found zero violations. 19 See RCR Decl. at Ex. B, App. D (“CCCEHD Records”) at 719–20. This inspection report was 20 signed by O’Hanks and the agency inspector Gabe Adebiyi. Id. A February 15, 1991 report, 21 signed by Jae Kwon and inspector Adebiyi, listed 10-15 gallons per month of PCE waste, and 22 recommended the need for employee training, a written contingency/emergency plan, and 23 required accumulation date on labels. Id. at 721–23; RCR Decl. ¶ 17. Specifically, the report 24 marked the following areas as “violations” of the California Administration Code: labels under 25 General, training under Prevention, and name list and copies under Contingency. CCCEHD 26 Records at 721. 27 Mr. Clark-Riddell stated that the first agency inspections of the Site by the CCCEHD “are 1 “PCE releases persisted at drycleaning facilities despite the increasing inspections, laws, and 2 regulations. The CCCEHD inspection reports referenced above from 1984 to 1999 document 3 continued PCE usage, waste accumulation, and waste disposal during this period, and the 1991 4 inspection report identified the need for improved PCE handling[.]” Id. 5 Mr. Clark-Riddell also opined, “[T]he fact that PCE leaks and releases can readily move 6 through concrete means that PCE can impact the subsurface quickly after the release and allow 7 for leaks and releases over time to continue to impact the site subsurface.” Id. ¶ 18. He further 8 stated, “[I]t is more probable than not that the PCE releases at the Site were the result of periodic 9 or ongoing spills and leaks, and possibly one or more sudden and accidental releases.” Id. ¶ 23; 10 Docket No. 168 (“Casa Nido Reply”) at 2. Mr. Clark-Riddell stated that based on the presence of 11 PCE found near and below soil level at the Site and the estimated 275 feet of PCE groundwater 12 plume length observed, “[T]he detected PCE is the result of PCE release(s) commencing in the 13 1960’s or 1970’s. This characterizes the first releases at the Site but does not preclude nor make 14 unlikely later releases.” Id. at ¶ 26–27. Mr. Clark-Riddell noted that the front-end of the 15 observed 275-foot PCE plume was most likely due to a release in 1984 or later. Id. ¶ 26. 16 Sentry issued three consecutive policies to First Name Insured O’Hanks and Additional 17 Insured Casa Nido, all with policy No. 33-14146-01 (“Sentry Policies”). Fact Stip. ¶ 1–3. The 18 Sentry Policies were effective from August 15, 1987 to August 15, 1990 (“Policy Period”). Id. ¶ 19 4. The policies are comprised of the following relevant sections: (1) the Businessowners Liability 20 (“BL”) Coverage Form, and (2) the Dry Cleaners Endorsement (“DCE”). See Docket No. 74-1 21 (“Sentry Policies”). 22 Notably, while the BL Coverage Form generally tracks standard CGL language, the DCE, 23 which provides the exception to the BL Coverage pollution exclusion, does not use standard CGL 24 language. 25 1. The Businessowners Liability Coverage Form:

26 A. COVERAGES

27 1. BUSINESS LIABILITY. We will pay those sums that the “advertising injury” to which this insurance applies. No other 1 obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for under COVERAGE 2 EXTENSION – SUPPLEMENTARY PAYMENTS.

3 a. This insurance applies only:

4 (1) To “bodily injury” or “property damage”:

5 (a) That occurs during the policy period; and 6 (b) That is caused by an “occurrence”. The “occurrence” must take place in the 7 “coverage territory”.

8 . . .

9 b. We will have the right and duty to defend any “suit” seeking those damages. But 10 (1) The amount we will pay for damages is limited 11 as described in Section D – Limits of Insurance;

12 (2) We may investigate and settle any claim or “suit” at our discretion; and 13 (3) Our right and duty to defend end when we have 14 used up the applicable limit of insurance in the payment of judgments or settlements or medical 15 expenses.

16 D. LIABILITY AND MEDICAL EXPENSES LIMITS OF

INSURANCE

17 1. The Limits of Insurance shown in the Declarations and rules 18 below fix the most we will pay regardless of the number of:

19 a. Insureds; b. Claims made or “suits” brought; or 20 c. Persons or organizations making claims or bringing “suits”. 21 22 Sentry Policies (BL Coverage Form) § (A)(1), (D)(1). 23 2. The Businessowners Liability Coverage Form includes the Supplementary 24 Payments Provision, in relevant part:

25 e. COVERAGE EXTENSION – SUPPLEMENTARY

PAYMENTS

26 In addition to the Limit of Insurance, we will pay, with 27 respect to any claim or “suit” we defend: 1 . . .

2 (4) All reasonable expenses incurred by the insured at our request to assist us in the investigation or 3 defense of the claim or “suit”[.] 4 Sentry Policies (BL Coverage Form) § (A)(1)(e). 5 3. The Businessowners Liability Coverage Form further includes a pollution 6 exclusion (“Pollution Exclusion”), which states:

7 B. EXCLUSIONS

8 1. APPLICABLE TO BUSINESS LIABILITY COVERAGE – This insurance does not apply to: 9 . . . 10 f. (1) “Bodily injury” or “property damage” arising out of 11 the actual, alleged or threatened discharge, dispersal, release or escape of pollutants[] 12 Pollutants means any solid, liquid, gaseous or thermal 13 irritant or contaminant including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes 14 materials to be recycled, reconditioned or reclaimed. 15 Sentry Policies (BL Coverage Form) § (B)(1)(f). 16 4. Definition of “occurrence”:

17 F. LIABILITY AND MEDICAL EXPENSES DEFINITIONS

18 . . .

19 9. “Occurrence” means an accident, including continuous or repeated exposure to substantially the same general 20 harmful conditions. 21 Sentry Policies (BL Coverage Form) § (F)(9). 22 5. The DCE entitled “Dry Cleaners Additional Coverages” in the Policy states:

23 II. LIABILITY The following provisions are added to the Businessowners 24 Liability Coverage Form.

25 . . .

26 M. POLLUTION LIABILITY INSURANCE

27 1. The pollution liability exclusion (B.1.f.) does not 1 2. This insurance applies to “bodily injury” or “property damage” arising from the actual, alleged or threatened 2 discharge, dispersal, release or escape of pollutants. Pollutants means any solid, liquid, gaseous or thermal 3 irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes 4 materials to be recycled, reconditioned or reclaimed.

5 a. A separate pollution limit of $100,000 applies to all damages, including sums paid under Coverage 6 Extension – Supplementary Payments, for all occurrences during the policy period. 7 . . . 8 b. For purposes of pollution liability, including 9 limits of liability, occurrence is the date on which “bodily injury” or “property damage” first 10 manifests itself. The policy in effect at that time, and no other, shall apply to the “bodily injury” or 11 “property damage,” including any enhanced injury or damage resulting from continued or repeated 12 exposure to the same pollutants beyond the policy period. 13 14 Sentry Policies (DCE) § (II)(M) (emphasis added). 15 III. LEGAL STANDARDS 16 A. Summary Judgment 17 Summary judgment is proper “if the movant shows that there is no genuine dispute as to 18 any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). 19 An issue of fact is genuine only if there is sufficient evidence for a reasonable jury to find for the 20 nonmoving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248–49 (1986). “The mere 21 existence of a scintilla of evidence . . . will be insufficient; there must be evidence on which the 22 jury could reasonably find for the [nonmoving party].” Id. at 252. At the summary judgment 23 stage, evidence must be viewed in the light most favorable to the nonmoving party and all 24 justifiable inferences are to be drawn in the nonmovant’s favor. See id. at 255. 25 Where a defendant moves for summary judgment based on a claim for which the plaintiff 26 bears the burden of proof, the defendant need only point to the plaintiff’s failure “to make a 27 showing sufficient to establish the existence of an element essential to [the plaintiff's] case.” 1 When parties file cross-motions for summary judgment or partial summary judgment, 2 “[T]he mere fact that the parties make cross-motions for summary judgment does not necessarily 3 mean that there are no disputed issues of material fact and does not necessarily permit the judge to 4 render judgment in favor of one side or the other.” Starsky v. Williams, 512 F.2d 109, 112 (9th 5 Cir. 1975). However, summary judgment in favor of one party may be appropriate where “the 6 parties in fact agree[ ] that all of the underlying material facts [are] those reflected by the written 7 record before the court,” and only a legal dispute remains. Id.; USF Ins. Co. v. Clarendon Am. 8 Ins. Co., 452 F. Supp. 2d 972, 984 (C.D. Cal. 2006). 9 B. Interpretation of Insurance Policy 10 The interpretation of the terms of an insurance policy generally is a question of law. 11 Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 44 (Cal. 1995). “Interpretation of insurance 12 contracts under California law requires [that courts] employ general principles of contract 13 interpretation.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008) 14 (citing MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635 (2003)). 15 The California Supreme Court explained:

16 The fundamental rules of contract interpretation are based on the premise that the interpretation of a contract must give effect to the 17 “mutual intention” of the parties. “Under statutory rules of contract interpretation, the mutual intention of the parties at the time the 18 contract is formed governs interpretation. Such intent is to be inferred, if possible, solely from the written provisions of the 19 contract. The ‘clear and explicit’ meaning of these provisions, interpreted in their ‘ordinary and popular sense,’ unless ‘used by the 20 parties in a technical sense or a special meaning is given to them by usage’, controls judicial interpretation.” A policy provision will be 21 considered ambiguous when it is capable of two or more constructions, both of which are reasonable. But language in a 22 contract must be interpreted as a whole, and in the circumstances of the case, and cannot be found to be ambiguous in the abstract. 23 Courts will not strain to create an ambiguity where none exists. 24 Waller, 11 Cal. 4th at 18–19 (citations omitted). In an insurance coverage dispute, “coverage is 25 interpreted broadly so as to afford the greatest possible protection to the insured, [whereas] 26 exclusionary clauses are interpreted narrowly against the insurer.” Manzarek, 519 F.3d at 1032 27 (citing MacKinnon, 31 Cal. 4th at 648). An “exclusionary clause must be conspicuous, plain and 1 that the claim is within the basic scope of coverage and on the insurer to establish that the claim is 2 specifically excluded.” MacKinnon, 31 Cal.4th at 648. If the insurer can show the occurrence is 3 specifically excluded, the burden shifts back to the insured to show an “exception affords 4 coverage.” Aydin Corp. v. First State Ins. Co., 18 Cal. 4th 1183, 1192 (1998), as modified on 5 denial of reh’g (Oct. 14, 1998). Here, the BL Coverage Form provides the basic scope of 6 coverage, which excludes pollution coverage, and the DCE provides an exception to that 7 exclusion. Thus the burden rests on the insured to show the exception affords coverage. 8 C. Duty to Defend 9 Under California law, an insurer’s duty to defend an insured is broader than the duty to 10 indemnify and may apply where no damages are ultimately awarded. Horace Mann Ins. Co. v. 11 Barbara B., 4 Cal. 4th 1076, 1081 (1993); Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 278 (1966). 12 An insurer has a duty to defend against lawsuits brought against its insured that potentially seek 13 covered damages; an insurer has a duty to indemnify its insured when the insured has been found 14 liable for damages actually covered by the policy. See Collin v. Am. Empire Ins. Co., 21 Cal. App. 15 4th 787, 803 (1994). 16 “[T]he determination whether the insurer owes a duty to defend usually is made in the first 17 instance by comparing the allegations of the complaint with the terms of the policy. Facts 18 extrinsic to the complaint give rise to a duty to defend when they reveal a possibility that the claim 19 may be covered by the policy.” Waller, 11 Cal. 4th at 19. “If any facts stated or fairly inferable in 20 the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially 21 covered by the policy, the insurer’s duty to defend arises and is not extinguished until the insurer 22 negates all facts suggesting potential coverage. On the other hand, if, as a matter of law, neither 23 the complaint nor the known extrinsic facts indicate any basis for potential coverage, the duty to 24 defend does not arise in the first instance.” Scottsdale Ins. Co. v. MV Transportation, 36 Cal. 4th 25 643, 655 (2005). “In general, doubt as to whether an insurer owes a duty to defend ‘must be 26 resolved in favor of the insured.’” Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 59 Cal. 4th 27 277, 287 (2014) (internal citation omitted). 1 IV. DISCUSSION 2 A. Duty to Defend 3 Whether Sentry has a duty to defend Casa Nido depends on whether the pollution, i.e., the 4 PCE contamination, occurred within the Policy Period. If the pollution occurred outside of the 5 Policy Period, then Sentry would not have a duty to defend because there would be no possibility 6 of coverage. Whether the pollution occurred within the Policy Period depends on what the trigger 7 of coverage is under the Sentry Policies. “‘[T]rigger of coverage’ is a term of convenience used to 8 describe that which, under the specific terms of an insurance policy, must happen in the policy 9 period in order for the potential of coverage to arise. The issue is largely one of time—what must 10 take place within the policy’s effective dates for the potential of coverage to be ‘triggered’?” 11 Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 655 n. 2 (1995) (emphasis in 12 original). Casa Nido argues that the “continuous injury trigger” applies to the Policies. See Casa 13 Nido Reply at 3. Sentry argues that the “manifestation trigger” as defined by Montrose applies 14 here. See Sentry Cross-Mot. at 8–10. 15 1. Interpretation of “First Manifests” 16 The Sentry Policies cover pollution-based property damage “[t]hat occurs during the policy 17 period.” Sentry Policies (DCE) § (I)(A). For purposes of pollution liability under the DCE, 18 property damage “occurs” when it “first manifests itself.” Sentry Policies (DCE) § (II)(M). In 19 Montrose, the California Supreme Court explained that the manifestation trigger is an objective 20 “should have known” standard: coverage is triggered at “that point in time when appreciable 21 damage occurs and is or should be known to the insured, such that a reasonable insured would be 22 aware that his notification duty under the policy has been triggered.” Montrose, 10 Cal. 4th at 23 674. 24 However, because Montrose was decided five to eight years after the policies in question 25 were written, the Court examines the meaning of the trigger language when the parties contracted. 26 As such, the relevance of Montrose turns on the extent it accurately described California law on 27 the meaning of “manifests” in the insurance context at the time the parties entered into the 1 Here, it is clear that the meaning of the term “manifests” at the time the parties entered the 2 contract was in accord with the objective standard articulated in Montrose. See, e.g., Cal. Union 3 Ins. Co. v. Landmark Ins. Co., 145 Cal. App. 3d 462, 476 (Ct. App. 1983); Home Ins. Co. v. 4 Landmark Ins. Co., 205 Cal. App. 3d 1388, 1392 (Ct. App. 1988) (first citing Cal. Union Ins. Co., 5 145 Cal. App. 3d 462; and then citing Snapp v. State Farm Fire & Cas. Co., 206 Cal. App. 2d 827 6 (Ct. App. 1962)). In Cal. Union Ins. Co., a case determining two insurance companies’ coverage 7 obligations for property damage, the court held that coverage is triggered when “the damage first 8 becomes apparent[.]” 145 Cal. App. 3d at 476. Applying this standard to the facts before it, the 9 court stated that the property “damage first manifested itself” in 1980, “albeit its cause had its 10 genesis in June 1979 when the pool was installed and filled.” Id. (emphasis added). Later, in 11 Home Ins. Co., the court stated that “in property damage cases ‘manifestation’ routinely refers to 12 when the damage first ‘becomes apparent.’” 205 Cal. App. 3d at 1392. See also Clemco Indus. v. 13 Com. Union Ins. Co., 665 F. Supp. 816, 822, 826-27 (N.D. Cal. 1987), aff’d, 848 F.2d 1242 (9th 14 Cir. 1988); Todd Shipyards Corp. v. Black, 717 F.2d 1280, 1290 (9th Cir. 1983) (explaining an 15 injury manifests itself “when it becomes reasonably capable of medical diagnosis.” (internal 16 citation omitted) (emphasis added)); Urie v. Thompson, 337 U.S. 163, 170 (1949) (“The record 17 before us is clear that Urie became too ill to work in May of 1940 . . . There is no suggestion that 18 Urie should have known he had silicosis at any earlier date . . . ‘It follows that no specific date of 19 contact with the substance can be charged with being the date of injury . . . consequently the 20 afflicted employee can be held to be “injured” only when the accumulated effects of the 21 deleterious substance manifest themselves.’” (quoting Associated Indem. Corp. v. State Indus. 22 Acc. Comm’n, 124 Cal. App. 378, 381 (Cal. Ct. App. 1932) (emphasis added)). There can be no 23 doubt that a determination as to the time at which damage becomes “apparent” is based on an 24 objective standard.1 It follows, then, that California courts have long understood the manifestation 25 1 As Sentry notes, the dictionary definitions of the term “manifest” comport with the objective 26 interpretation of the manifestation trigger eventually set forth in Montrose. Sentry Reply at 6. Courts often refer to dictionary definitions in interpreting insurance policies. Northrop Grumman 27 Corp. v. Factory Mut. Ins. Co., 563 F.3d 777, 784 (9th Cir. 2009). The Oxford English Dictionary 1 trigger in a manner akin to the objective manifestation standard set forth in Montrose, and thus 2 that presumably was what the parties herein intended when they contracted.2 3 However, the more critical question concerns whether in light of the “first manifest” 4 standard, there are multiple “occurrences” when there are multiple spills, such that the “first 5 manifests” test can apply to each discrete spill. As noted above, the DCE provides, “For purposes 6 of pollution liability, including limits of liability, occurrence is the date on which ‘bodily injury’ 7 or ‘property damage’ first manifests itself.” Sentry Policies (DCE) § (II)(M) (emphasis added). 8 According to Sentry, “the word ‘first’ [] modifies the word ‘manifest[,]’” such that coverage is 9 triggered only if overall PCE contamination in the aggregate at the site first became reasonably 10 discoverable during the policy period. See Sentry Mot. at 9. In Sentry’s view, that would be a 11 one-time occurrence. Relying on this interpretation, Sentry argues the PCE contamination at 12 issue is not covered because the overall PCE contamination most likely first manifested before the 13 Policy Period in the early 1980s. See RCR Decl. ¶ 26. In contrast, Casa Nido, relying on Morrow 14 Corp. v. Harleysville Mut. Ins. Co., 101 F. Supp. 2d 422 (E.D. Va. 2000), argues that the question 15 is not when PCE contamination in the aggregate first became discoverable, but when each discrete 16 release of PCE first became discoverable, i.e., the point at which each successive release of PCE 17 first manifested itself. See id. at 432–33 (“Simply because there may have been prior damage 18 caused by earlier PCE contamination does not mean that subsequent releases did not cause damage 19 that ‘first manifested itself’ at the time of those later releases.”). Sentry counters, asserting “the 20

21 Heritage Dictionary defines manifest as “[c]learly apparent to the sight or understanding; obvious.” Manifest, American Heritage Dictionary (5th ed. 2022). 22

2 This understanding was consistent with a national consensus on the meaning of the term 23 “manifests” in the insurance context. See, e.g., Ins. Co. of N. Am. v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980) (“The date of manifestation is the date when the worker knew or 24 should have known he has asbestosis, or the date that asbestosis is medically diagnosed, whichever came first.”) (emphasis added); Eagle-Picher Indus., Inc. v. Liberty Mut. Ins. Co., 682 25 F.2d 12, 16 (1st Cir. 1982) (Under the manifestation theory, coverage is triggered when an injury “first manifest[s] itself by way of medically diagnosable symptoms”); see also Am. Home Prod. 26 Corp. v. Liberty Mut. Ins. Co., 565 F. Supp. 1485, 1489 (S.D.N.Y. 1983) (explaining that manifests “has been defined to mean when the injury was diagnosed or when it produced 27 symptoms that placed or should have placed the injured person on notice”); Keene Corp. v. Ins. 1 word ‘first’ loses its significance if ‘every iterative discharge’ constitutes PCE contamination.” 2 Sentry Reply at 9. 3 The Court interprets the DCE language consistent with Morrow. At the very least, the 4 language of the policy regarding occurrence is ambiguous and must be read in the insured’s favor. 5 Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1032 (9th Cir. 2008) (“In the event 6 of an ambiguity, we must interpret contractual terms to ‘protect the objectively reasonable 7 expectations of the insured.’” (quoting Boghos v. Certain Underwriters at Lloyd’s of London, 36 8 Cal. 4th 495, 501 (2005)). The policy language supports Casa Nido’s interpretation. The standard 9 BL Policy provides, an “‘[o]ccurrence’ means an accident, including continuous or repeated 10 exposure to substantially the same general harmful conditions.” Sentry Policies (BL Coverage 11 Form) § (F)(9). While the DCE specifies the manifestation trigger for coverage of an occurrence, 12 the basic definition of “occurrence” in the DCE is consistent with that in the BL Coverage Form:

13 For purposes of pollution liability, including limits of liability, occurrence is the date on which “bodily injury” or “property 14 damage” first manifests itself. The policy in effect at that time, and no other, shall apply to the “bodily injury” or “property 15 damage,” including any enhanced injury or damage resulting from continued or repeated exposure to the same pollutants beyond the 16 policy period. 17 Sentry Policies (DCE) § (II)(M) (emphasis added). Under both the Policy and the DCE, “property 18 damage” may be said to “occur” when there is a spill which results in contamination of the soil. 19 That property damage can occur each time there is such a spill. Thus, for instance, if there is a 20 spill that occurred one time each year, each yearly spill could be deemed an occurrence. That 21 could be true if spills occurred twice a year, monthly, or weekly. 22 To be sure, the language “including any . . . damage resulting from continued or repeated 23 exposure of the same pollutants,” Sentry Policies (DCE) § (II)(M), could suggest that each 24 repeated exposure of the same pollutant constitutes a single occurrence. But it need not. As for 25 the plain language, simply because damage resulting from continued or repeated exposure may 26 constitute a single occurrence does not mean it must constitute a single occurrence. And, because 27 the provision appears in the DCE, a portion of the Policy that provides an exception to the 1 favor of the insured. See E.M.M.I. Inc. v. Zurich Am. Ins. Co., 32 Cal. 4th 465, 471 (2004) 2 (“[E]xceptions to exclusions are broadly construed in favor of the insured.” (quoting Aydin Corp. 3 v. First State Ins. Co., 18 Cal. 4th 1183, 1192 (1998)). Moreover, it appears the explicit purpose 4 of the provision within the DCE is to extend coverage to subsequent discharges that occur outside 5 the Policy Period: “including any enhanced injury or damage resulting from continued or repeated 6 exposure to the same pollutants beyond the policy period.” Sentry Policies (DCE) § (II)(M) 7 (emphasis added). That is, if discharges subsequent to the triggering discharge are continuous or 8 repetitive of the triggering discharge, the subsequent discharges would be covered even if they 9 first manifest outside of Policy Period, as they would be considered part of a single occurrence 10 that first manifested during the Policy Period. Since courts “consider policy language in context 11 to discern its intended function,” McMillin Homes Constr., Inc. v. Nat’l Fire & Marine Ins. Co., 12 35 Cal. App. 5th 1042, 1050 (2019) (internal citation omitted), a reasonable distinction could be 13 made between an interpretation of “occurrence” which extends coverage in one context from one 14 which limits coverage in another. See MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 648 (2003) 15 (“[I]nsurance coverage is interpreted broadly so as to afford the greatest possible protection to the 16 insured.” (citations omitted)). In each instance, ambiguity may be interpreted in the insured’s 17 favor. Manzarek, 519 F.3d at 1032. 18 In any event, even if “occurrence” is interpreted to encompass any repeated or continuous 19 exposure irrespective of context, the term is sufficiently ambiguous to give rise to a factual 20 question whether the timing and frequency of the PCE spillage at the Site during the Policy Period 21 could be deemed “repeated or continuous” within the meaning of the Sentry Policies. There is 22 evidence sufficient to create an issue of fact regarding the nature and timing of the spills here. 23 Casa Nido alleges that “there were sudden and accidental spills and equipment overflows of PCE 24 . . . during the 32-year period that Defendant O’Hanks operated the dry-cleaning business on the 25 Property . . . and these sudden and accidental spills and overflows resulted in PCE being released.” 26 TAC at 4–5. Casa Nido’s expert, Mr. Clark-Riddell, opined that “it is more probable than not that 27 the PCE releases at the Site were the result of periodic or ongoing spills and leaks, and possibly 1 of PCE spills, leaks, and accidental and sudden releases likely continued into the 1980’s and 2 1990’s[.]” RCR Decl. ¶ 17. In addition, the underlying complaint and Mr. Clark-Ridell’s report 3 allege “sudden and accidental” PCE discharges rather than a continuous pattern. See, e.g., TAC ¶¶ 4 20, 23, 26; RCR Decl. ¶ 17. 5 Morrow is persuasive on this point. The policies at issue in Morrow included an exception 6 to a pollution exclusion for damage from “sudden and accidental” discharges of pollution. See 7 Morrow Corp., 101 F. Supp. 2d at 430. Sentry argued that the damage was not covered because 8 “the underlying complaint allege[d] not sudden and accidental PCE discharges, but rather a 9 continuous pattern of discharges during the time plaintiffs were in business[.]” Id. at 432. The 10 court was not convinced. It noted that the underlying complaint did not allege that “the PCE 11 discharges occurred as a continuous pattern or that the allegations are limited to such a pattern; 12 instead, [. . .] the underlying complaint uses terms (‘spilled,’ ‘discharged,’ ‘released’) which 13 encompass releases that are sudden and accidental, as well as releases that are part of a continuous 14 pattern.” Id. Thus, while the court noted that “Sentry may ultimately succeed in proving that all 15 or a portion of the Greenbriar settlement is attributable to damages owing to a continuous pattern 16 of PCE pollution that occurred during the 1987–89 coverage period[,]” it concluded that “[a]t this 17 stage, the inquiry is not whether the releases were in fact sudden and accidental, but simply 18 whether the underlying complaint’s allegations reasonably included sudden and accidental releases 19 of PCE.” Id.; see also Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 19 (Cal. 1995) (“[T]he 20 determination whether the insurer owes a duty to defend usually is made in the first instance by 21 comparing the allegations of the complaint with the terms of the policy.”). In essence, Morrow 22 recognized that the dispute at issue rested on a distinction between continuous and repetitive 23 pollution and non-continuous and non-repetitive pollution, and concluded the resolution was a 24 factual question for a later stage. Morrow supports the conclusion that whether the pollution was 25 continuous or repetitive is not a question that can be resolved at the summary judgment stage, but 26 a question of fact. 27 Finally, contrary to Sentry’s claim, the word “first” does not lose “its significance if ‘every 1 interpretation recognizes that certain discharges might have first manifested before the Policy 2 Period, certain discharges might have first manifested during the Policy Period, and certain 3 discharges might have first manifested after the Policy Period, but only those that first manifested 4 during the Policy Period are covered. Thus, Sentry has a duty to defend claims arising out of 5 those discrete discharges, and only those discrete discharges, for which Casa Nido establishes a 6 possibility of first manifestation during the Policy Period. 7 2. Duty to Defend 8 Because there is a question of fact as to whether there were occurrences within the policy 9 period, the question arises when any such occurrences were first manifest, the trigger to coverage 10 here. Typically, the point at which a reasonable insured should have known of the damage or at 11 which the damage became reasonably discoverable would be a factual question reserved for the 12 jury, precluding summary judgment. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 13 (1986). That is the case here, particularly where the issue is Sentry’s duty to defend. Casa Nido 14 need only prove that the damage is potentially covered by the policy, not that the damage is 15 actually covered. See Collin v. Am. Empire Ins. Co., 21 Cal. App. 4th 787, 803 (1994). To that 16 end, “[I]t is well-established that when ‘coverage depends on an unresolved dispute over a factual 17 question, the very existence of that dispute would establish a possibility of coverage and thus a 18 duty to defend.’” Liberty Surplus Ins. Corp. v. Landmark Am. Ins. Co., No. 17-cv-1401-DMS 19 (AGS), 2018 WL 3413865, at *5 (S.D. Cal. May 29, 2018) (quoting Mirpad, LLC v. Cal. Ins. 20 Guarantee Assn., 132 Cal. App. 4th 1058, 1068 (Cal. Ct. App. 2005)). Thus, if Casa Nido can 21 demonstrate the mere possibility that a reasonable insured should have known of at least some 22 PCE contamination during the Policy Period, and said contamination includes a sufficiently 23 discrete incident as to constitute an “occurrence” within meaning of the DCE policy, then there is 24 a potential for coverage and Casa Nido must prevail on its motion for summary judgment as to the 25 duty of Sentry to defend. 26 Sentry argues that Casa Nido has not established a genuine issue of material fact as to 27 whether the PCE contamination at the Property “first manifest[ed] itself” during the Policy Period 1 stipulation that it “did not know, nor had any reason to know, before 2016, of the existence of the 2 subsurface contamination.” Fact Stip. ¶ 8. However, this stipulation of fact is not dispositive. 3 The question here is not merely whether Casa Nido should have known of the PCE contamination, 4 but whether a reasonable insured should have known of the PCE contamination. See Montrose 5 Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 674 (1995). For that matter, there is no equally 6 definitive statement about what O’Hanks, the first-party insured, should have known during the 7 Policy Period. 8 Notably, in addition to the evidence of spills discussed above, Mr. Clark-Riddell notes that 9 the front-end of the observed 275-foot PCE plume is most likely due to a release in 1984 or later. 10 Id. ¶ 26. Further, Mr. Clark-Riddell notes changing practices in the dry-cleaning industry. For 11 example, “In 1976, the Resource Conservation and Recovery Act (RCRA) was enacted to address 12 public concern about the serious problems related to disposal of hazardous wastes.” Id. The 13 CCCEHD performed inspection and compliance reports at the Site in the 1980’s and 1990’s when 14 O’Hanks operated the business. The earliest CCCEHD report on record is from December 31, 15 1984, which showed the average PCE waste generation of 25 gallons per month. The report stated 16 that no plan of correction was necessary, presumably meaning that O’Hanks was in compliance 17 with the PCE usage and waste protocols as of December 31, 1984. See CCCEHD Records at 719– 18 20. Seven years later, the 1991 CCCEHD report identified the need for improved PCE handling at 19 the Site by recommending employee training, a written contingency/emergency plan, and required 20 accumulation date on labels. See id. at 721–23; RCR Decl. ¶ 17. Given the 1991 report made this 21 finding one year after the Policy Period ended, the possibility certainly exists that O’Hanks and 22 Casa Nido knew, or should have known, of contamination due to their PCE usage and disposal 23 during the years immediately preceding the 1991 report (i.e., during the Policy Period of 1987 to 24 1990). 25 The general awareness of the risks of PCE usage in the dry-cleaning industry, the 26 continuing risk of spills in the 1980’s and 1990’s, the CCCEHD reports, and the fact that the front 27 of the PCE plume is likely the result of a release in 1984 or later suggests a possibility that Casa 1 and accidental and sudden releases first manifested during the Policy Period. 2 Thus, Casa Nido has established “a possibility that the claim may be covered by the 3 policy,” Waller, 11 Cal.4th at 19, and Sentry has failed to “negate[] all facts suggesting potential 4 coverage.” Scottsdale Ins. Co. v. MV Transportation, 36 Cal. 4th 643, 655 (2005). 5 Therefore, the Court finds that Sentry has a duty to defend because a possibility of 6 coverage exists under the Policy. The Court GRANTS Casa Nido’s motion for partial summary 7 judgment with respect to Sentry’s duty to defend Casa Nido and DENIES Sentry’s cross-motion 8 for summary judgment as to the same. 9 B. Defense Costs Coverage Limit 10 After finding that Sentry has a duty to defend Casa Nido, the next inquiry is whether 11 Sentry’s costs of defending Casa Nido are limited to $100,000 pursuant to the DCE. Casa Nido 12 argues that defense costs should not be included in the “Supplementary Payments” provision 13 because § (A)(1)(b) of the Businessowners Liability Coverage Form overrides any separate 14 provisions limiting defense costs. Sentry argues that the DCE expressly limits defense costs to 15 $100,000 that would otherwise not be limited under the “Supplementary Payments” provision. 16 In this case, the Supplementary Payment provision provides in part: “we will pay, with 17 respect to any claim or ‘suit’ we defend: (1) All expenses we incur . . . (4) All reasonable expenses 18 incurred by the insured at our request to assist us in the investigation or defense of the claim or 19 ‘suit’[.]” Sentry Policies (BL Coverage Form) § (A)(1)(e) (emphasis added). A “suit” is defined 20 to mean a civil proceeding in which damages because of . . . ‘property damage’ . . . to which this 21 insurance applies are alleged.” Sentry Policies (BL Coverage Form) § (F)(13). As the italicized 22 words indicate, the supplementary payments provision providing “All expenses we incur” is a 23 function of the Sentry’s defense obligation. See Prichard v. Liberty Mut. Ins. Co., 84 Cal. App. 24 4th 890, 911 (2000) (“‘We will pay, with respect to any claim or “suit” we defend: [¶] ... [¶] 5. All 25 costs taxed against the insured in the “suit.’” [. . .] As the italicized words indicate, the 26 supplementary payments provision providing all ‘costs taxed’ is a function of the insurer’s defense 27 obligation, not its indemnity obligation.”). The DCE then provides, however, that a “separate 1 – Supplementary Payments, for all occurrences during the policy period.” Sentry Policies (DCE) 2 § (II)(M). 3 Here, Sentry’s duty to defend is triggered by the DCE because pollution coverage is 4 otherwise excluded by the Sentry Policies. As such, Sentry’s duty is subject to any limitations set 5 forth in the DCE, including the $100,000 limit to coverage of sums paid under Coverage 6 Extension – Supplementary Payments. As noted, the Coverage Extension – Supplementary 7 Payments provides that Sentry “will pay, with respect to any claim or ‘suit’ we defend[.]” Sentry 8 Policies (BL Coverage Form) § (A)(1)(e) (emphasis added). It follows, then, that the $100,000 9 limitation in the DCE applies to Sentry’s duty to defend. 10 The case law is in accord. In Albert D. Seeno Constr. Co. v. Aspen Ins. UK Limited, 17-cv- 11 3765-SI, 2020 WL 5760170 (N.D. Cal. Sept. 28, 2020), the Court held that defense costs are 12 considered “supplementary payments” that erode the policy limits. Id. at *1. Cf. Karsant Fam. 13 Ltd. P’ship v. Allstate Ins. Co., No. C 08-01490 SI, 2009 WL 188036, at *7 (N.D. Cal. Jan. 27, 14 2009) (finding that identical language refers to the duty to defend and that costs “taxed against the 15 insured” includes attorneys’ fees but the costs “of defending any suit” does not include attorneys’ 16 fees). In Nat’l Union Fire Ins. Co. v. West Lake Academy, 548 F.3d 8 (1st Cir. 2008), the First 17 Circuit held that an endorsement policy that limits defense costs to $300,000 overrides the general 18 Supplementary Payments provision that on its own does not limit coverage, therefore, defense 19 costs were limited to $300,000. See id. at 17–18. 20 For the foregoing reasons, the Court DENIES Casa Nido’s motion for summary judgment 21 with respect to whether Sentry’s costs of defending Casa Nido are limited to $100,000 pursuant to 22 the DCE, and GRANTS Sentry’s cross-motion for summary judgment as to the same. 23 C. Breach of the Covenant of Good Faith and Fair Dealing 24 Lastly, Sentry seeks summary judgment with respect to Casa Nido’s claim that Sentry 25 breached the covenant of good faith and fair dealing. See Sentry Cross-Mot. at 15–16. Casa Nido 26 alleges Sentry breached the covenant when Sentry relied on Montrose to deny Casa Nido’s claims 27 and because Sentry failed to adequately investigate whether Casa Nido’s claims were covered. 1 “To establish breach of the implied covenant [of good faith and fair dealing], the insured 2 must show that: (1) benefits due under the policy were withheld, and (2) such withholding was 3 unreasonable.” O’Keefe v. Allstate Indem. Co., 953 F. Supp. 2d 1111, 1115 (S.D. Cal. 2013). 4 Ordinarily, “reasonableness of an insurer’s claims-handling conduct is . . . a question of fact [and 5 only] becomes a question of law where the evidence is undisputed and only one reasonable 6 inference can be drawn from the evidence.” Nieto v. Blue Shield of Cal. Life & Health Ins. Co., 7 181 Cal. App. 4th 60, 86 (2010) (citing Chateau Chamberay Homeowners Ass’n v. Associated 8 Int’l Ins. Co., 90 Cal. App. 4th 335 (2001)). However, “[w]hen the issue of the insurer’s objective 9 reasonableness depends on an analysis of legal precedent, reasonableness is a legal issue” for the 10 court. See CalFarm Ins. Co. v. Krusiewicz, 131 Cal. App. 4th 273, 287 (2005). 11 Whether Sentry breached the covenant of good faith and fair dealing by relying on 12 Montrose to deny Casa Nido’s claims is a question of law for the Court. See id. The Court finds 13 that it was reasonable for Sentry to rely on Montrose to deny Casa Nido’s claims because, as 14 explained above, the manifestation trigger as defined by Montrose applies to the Sentry Policies. 15 This finding is not impacted by the Court’s ultimate determination that Sentry has a duty to defend 16 for a number of reasons. First, Casa Nido has principally argued coverage on a theory that the 17 continuous injury trigger applies to the Sentry Policies, a theory with which the Court disagrees, 18 and Sentry fairly rejected. Second, as explained in the Court’s previous order, it was appropriate 19 for Sentry to look to Montrose because it is “not unreasonable to look to dictum from the Supreme 20 Court of California when interpreting California insurance law.” See Docket No. 144 at 9–10 21 (citing United Steelworkers of Am. v. Bd. of Educ., 162 Cal. App. 3d 823, 835 (Ct. App. 1984)). 22 Third, the central basis for the Court’s determination that Sentry has a duty to defend is based on 23 an ambiguity in the meaning of “first” in “first manifests,” an ambiguity that even if resolved in 24 Casa Nido’s favor still reasonably supports Sentry’s interpretation. And as noted above, Casa 25 Nido’s claim for coverage if far from compelling. It requires a favorable interpretation of the 26 DCE policy and a construction of the facts drawn in Casa Nido’s favor based on a chain of 27 inferences. As such, the Court GRANTS Sentry’s motion for summary judgment as to whether its 1 faith and fair dealing and with respect to the adequacy of its investigation of Casa Nido’s claims. 2 V. CONCLUSION 3 For the foregoing reasons, the Court GRANTS Casa Nido’s motion for partial summary 4 judgment with respect to Sentry’s duty to defend Casa Nido and DENIES Sentry’s cross-motion 5 for summary judgment as to the same. 6 The Court DENIES Casa Nido’s motion for summary judgment with respect to whether 7 Sentry’s costs of defending Casa Nido are limited to $100,000 pursuant to the DCE, and 8 GRANTS Sentry’s cross-motion for summary judgment as to the same. 9 The Court GRANTS Sentry’s cross-motion for summary judgment as to whether its 10 reliance on Montrose to deny Casa Nido’s claims constitutes a breach of the covenant of good 11 faith and fair dealing and whether its investigation of Casa Nido’s claims were sufficiently 12 adequate as to not constitute a breach of the covenant of good faith and fair dealing. 13 This order disposes of Docket Nos. 148 and 157. 14 15 IT IS SO ORDERED. 16 17 Dated: June 5, 2023 18 19 ______________________________________

EDWARD M. CHEN

20 United States District Judge 21 22 23 24 25 26 27