1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 KINGSLEY MANAGEMENT, CORP., a Case No.: 19-cv-1361-GPC-AGS Utah Corporation; KMC CA 12 MANAGEMENT, LLC, a Utah limited ORDER DENYING DEFENDANTS’ 13 liability company; and VILLA CAJON MOTION TO DISMISS MHC, L.P., a Utah limited partnership, PLAINTIFF’S FIRST AMENDED 14

COMPLAINT

Plaintiffs, 15 v. [ECF No. 11] 16

OCCIDENTAL FIRE & CASUALTY

17

COMPANY OF NORTH CAROLINA,

18 DBA NORTH CAROLINE

OCCIDENTAL FIRE & CASUALTY

19 COMPANY, a North Carolina 20 corporation; and OCCIDENTAL FIRE &

CASUALTY COMPANY OF NORTH

21 CAROLINA, a North Carolina 22 corporation, 23 Defendants. 24 25 Before the Court is Defendants’ Occidental Fire & Casualty Company of North 26 Carolina dba North Caroline Occidental Fire & Casualty Company and Occidental Fire & 27 Casualty Company of North Carolina (collectively, “Defendants” or “Occidental”) 1 motion to dismiss. ECF No. 11. Plaintiffs Kingsley Management Corporation, KMC CA 2 Management, LLC, and Villa Cajon MHC, L.P. (“Plaintiffs”) filed an opposition. ECF 3 No. 16. Defendants filed a reply. ECF No. 17. The Court finds this motion suitable for 4 decision without oral argument pursuant to Local Civil Rule 7.1(d)(1). 5 BACKGROUND 6 Plaintiffs are corporate entities organized under the laws of the State of Utah that 7 own, operate, and manage the Villa Cajon Mobile Home Estate, located at 255 East 8 Bradley Avenue, El Cajon, CA 92021 (“Subject Insured Property”). ECF No. 4 (“First 9 Amended Complaint” or “FAC”) ¶¶ 1-5. Defendants are North Carolina corporations 10 that provide the insurance policies that give rise to this litigation. Id. ¶¶ 6-8. Plaintiffs 11 allege that Defendants have a duty to provide insurance coverage for the defense of 12 claims in a class action lawsuit, Cox et al., v. Ametek, Inc., et al., Case No. 3:17-CV- 13 00579-GPC-AGS, filed in this Court on March 24, 2017 (“Underlying Action”). Id. ¶ 39. 14 I. Insurance Policies 15 Defendants provided Plaintiff Kingsley Management with three policies, Policy 16 No. MH13471, which covers the period December 31, 2014 until December 31, 2015 17 (FAC, Ex. A); Policy No. MH14035, which covers the period December 31, 2015 until 18 December 31, 2016 (FAC, Ex. B); and Policy No. MH14460, which covers the period 19 December 31, 2016 until December 31, 2017 (FAC, Ex. C) (collectively, the “Policies”). 20 The Policies name Plaintiffs KMC Management, KMC CA Management and Villa Cajon 21 as named insureds. FAC ¶ 17. 22 a. Coverage A 23 Under Coverage A for “Bodily Injury and Property Damage Liability,” the Policies 24 provide liability coverage for allegations of “property damage” and “bodily injury” 25 arising from an “occurrence.” FAC ¶¶ 18-19; ECF No. 4-1 at 116; ECF No. 4-2 at 121; 26 ECF No. 4-3 at 124. The Policies obligate Defendants to provide defense for any “suit” 27 seeking “property damage” against Plaintiffs, in accordance with the following: 1 1. Insuring Agreement

2 a. We will pay those sums that the insured becomes legally obligated to pay as 3 damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies. We will have the right and duty to defend the insured against any ‘suit’ 4 seeking those damages . . . 5 b. This insurance applies to ‘bodily injury’ and ‘property damage’ only if: 6

7 (1) The ‘bodily injury’ or 'property damage' is caused by an 'occurrence' that takes place in the 'coverage territory'; 8

9 (2) The ‘bodily injury’ or 'property damage' occurs during the policy period; and

10 (3) Prior to the policy period, no insured listed under Paragraph 1. of Section II – 11 Who Is An Insured and no 'employee' authorized by you to give or receive notice of an 'occurrence' or claim, knew that the ‘bodily injury’ or 'property damage’ had 12 occurred, in whole or in part. If such a listed insured or authorized 'employee' 13 knew, prior to the policy period, that the ‘bodily injury’ or 'property damage' occurred, then any continuation, change or resumption of such ‘bodily injury’ or 14 'property damage' during or after the policy period will be deemed to have been 15 known prior to the policy period.

16 FAC ¶ 21. Coverage A also contains a Pollution Exclusion: 17 This insurance does not apply to: 18 f. Pollution 19 (1) 'Bodily injury' or 'property damage' arising out of the actual, alleged or 20 threatened discharge, dispersal, seepage, migration, release or escape of 21 'pollutants':

22 (a) At or from any premises, site or location which is or was at any time owned or 23 occupied by, or rented or loaned to, any insured . . .

24 (b) At or from any premises, site or location which is or was at any time used by or 25 for any insured or others for the handling, storage, disposal, processing or treatment of waste; 26

27 1 (c) Which are or were at any time transported, handled, stored, treated, disposed of, or processed as waste by or for: 2

3 (i) Any insured; or

4 (ii) Any person or organization for whom you may be legally responsible; or 5 (d) At or from any premises, site or location on which any insured or any 6 contractors or subcontractors working directly or indirectly on any insured's behalf 7 are performing operations if the 'pollutants' are brought on or to the premises, site or location in connection with such operations by such insured, contractor or 8 subcontractor . . . 9 (e) At or from any premises, site or location on which any insured or any 10 contractors or subcontractors working directly or indirectly on any insured's behalf 11 are performing operations if the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess 12 the effects of, 'pollutants.' 13 FAC ¶ 22. The Policies contain an endorsement that modify the Coverage A Pollution 14 Exclusion in the following manner: 15 This insurance does not apply to: 16

17 f. Pollution

18 (a) “Bodily Injury” or “property damage” which would not have occurred in whole 19 or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants” at any time. 20

21 FAC ¶ 23 (emphasis added).

22 b. Coverage B 23 Under Coverage B, the Policies obligate Defendants to provide indemnity for any 24 “personal and advertising injury” and obligates Defendants to provide a defense for any 25 “suit” seeking damages for “personal and advertising injury.” FAC ¶ 26. Coverage B 26 provides: 27 1 1. Insuring Agreement

2 a. We will pay those sums that the insured becomes legally obligated to pay as 3 damages because of 'personal and advertising injury' to which this insurance applies. We will have the right and duty to defend the insured against any 'suit' 4 seeking those damages . . . 5 b. This insurance applies to 'personal and advertising injury' caused by an offense 6 arising out of your business but only if the offense was committed in the 'coverage 7 territory' during the policy period.

8 Id. Coverage B also contains the following Pollution Exclusion: 9 A. Exclusion m. under Paragraph 2., Exclusions of Section I – Coverage B – 10 Personal and Advertising Injury Liability I replaced by the following:

11 This insurance does not apply to: 12 a. “Personal and advertising injury”; 13

14 (10) Arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release, growth, or escape of “pollutants” at any time. 15

16 B. The definition of “pollutants” under Section V – Definitions is replaced by the following: 17

18 “Pollutants” mean any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, mold, 19 fungi, bacteria, and other similar microbial contaminants, chemicals and 20 waste. Waste includes materials to be recycled, reconditioned or reclaimed. 21 FAC ¶ 27. 22 c. Other Coverage 23 The Policies also provide a Supplementary Payments coverage, which, in 24 part, provides that Defendants will pay, with respect to a claim that settles or any suit 25 against an insured “all expenses we incur” and “all court costs taxed against the insured 26 in the ‘suit.’” FAC ¶ 28. 27 / / / 1 d. Terms 2 Under Coverage A, the Policies apply for a suit seeking “Property Damage” to 3 tangible property. FAC ¶ 33. Under Coverage B, the Policies apply for a suit seeking 4 “Personal Injury” under Coverage B, including nuisance and trespass. Id. Accordingly, 5 any such claim or suit alleged against Plaintiffs will trigger Occidental’s duty to defend 6 and indemnify pursuant to the Policies. 7 The Policies define ‘occurrence’ as “an accident, including continuous or repeated 8 exposure to substantially the same general harmful conditions.” FAC ¶ 30. 9 The Policies define ‘bodily injury’ as “bodily injury, sickness or disease sustained 10 by a person, including death resulting from any of these at any time. Id. ¶ 31. 11 The Policies define ‘personal and advertising injury’ as inclusive of a claim for 12 nuisance and/or trespass: 13 ‘Personal and advertising injury’ means injury, including consequential 'bodily injury,' arising out of one or more of the following offenses . . . c. The wrongful 14 eviction from, wrongful entry into, or invasion of the right of private occupancy of 15 a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor. 16

17 Id. ¶ 31. The Policies define ‘property damage’ as follows: 18 a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at 19 the time of the physical injury that caused it; or 20 b. Loss of use of tangible property that is not physically injured. All 21 such loss of use shall be deemed to occur at the time of the 22 'occurrence' that caused it.

23 The Policies define “suit” as “a civil proceeding in which damages because of 24 'bodily injury,' 'property damage' or 'personal and advertising injury' to which this 25 insurance applies are alleged." Id. ¶ 33. 26 / / / 27 1 II. Underlying Matter 2 On October 6, 2016, the California Department of Toxic Substances Control 3 (“DTSC”) issued a Proposition 65 Notification (“Prop 65 Notice”) to the San Diego 4 County Public Health Officer indicating that several chemicals considered human 5 carcinogens were detected at 790 Greenfield Drive, El Cajon, California (“Contaminated 6 Property”). ECF No. 4-4 at 2. The Prop 65 Notice states that Trichlorethylene (TCE) has 7 been found in the groundwater and soil gas at the Contaminated Property and 8 surrounding community. Id. at 3. Ametek, Inc. is listed as the responsible party and 9 Plaintiffs are not mentioned in the Prop 65 Notice. FAC ¶ 37. 10 The plaintiffs in the Underlying Matter (“Putative Underlying Class”) are all 11 individuals who were either past or current residents of the Subject Insured Property. 12 FAC ¶ 42. The Putative Underlying Class alleged that Ametek stored toxic waste at the 13 Contaminated Property from 1968 to 1988, and that Ametek was aware in 1987 or 1988 14 that chlorinated solvents and other chemical waste leached and leaked into the 15 groundwater and subsurface soil, thereby creating a groundwater plume. Id. ¶ 43-45. 16 The Putative Underlying Class alleged they suffered bodily harm, economic loss, and 17 interference with their use of and enjoyment of their homes and comfortable enjoyment 18 of life. Id. ¶ 46, 47. 19 a. Third Party Actions 20 On June 20, 2017, Senior Operations filed a third-party complaint against Plaintiffs 21 in the instant action (i.e., Villa Cajon, KMC CA Management, and Kingsley 22 Management), as well as the alleged owners of the other affected mobile home parks for 23 indemnity, equitable contribution, and declaratory relief. Id. ¶ 55. 24 On June 27, 2017, Ametek and Thomas Deeney also filed a third-party complaint 25 in the Underlying Matter against Plaintiffs in the instant action (i.e., Villa Cajon, KMC 26 CA Management, and Kingsley Management) for indemnity, comparative contribution, 27 and declaratory relief. Id. ¶ 59. 1 Senior Operations, Ametek, and Deeney allege that Plaintiffs purchased the 2 Subject Insured Property in late 2009 and early 2010 and that Plaintiffs were or should 3 have been aware of information about the environmental conditions of the Subject 4 Insured Property, including the subject plume described in the Prop 65 Notice that gave 5 rise to the Underlying Matter. Id. ¶ 56, 60. Senior Operations, Ametek, and Deeney did 6 not allege that Plaintiffs were responsible for the actual acts of pollution that gave rise to 7 the Underlying Matter. Id. ¶ 58, 62.1 Plaintiffs allege that at no point did any party in the 8 Underlying Matter allege that Plaintiffs created or caused the environmental pollution 9 event that affected the Subject Insured Property and gave rise to the Underlying Matter. 10 Id. ¶ 63-71. 11 III. Requests for Insurance Coverage 12 On June 20, 2017, Plaintiffs notified Occidental of the Underlying Matter and 13 requested a defense and indemnity pursuant to the Policies. Id. ¶ 73. On the same day, 14 Occidental’s third-party claims administrator, Innovative Risk Management, requested a 15 copy of the complaint in the Underlying Matter. Id. ¶ 74. 16 On July 14, 2017, Occidental requested information regarding the date on which 17 Villa Cajon and Kingsley Management were served with the complaint in the Underlying 18 Matter. Id ¶ 75. On the same day, Plaintiffs emailed Occidental and requested that 19 Occidental coordinate with Plaintiffs to defend the pleadings in the Underlying Matter on 20 behalf of all three Plaintiffs. Id. ¶ 76. Defendants replied and asked Plaintiffs whether 21 they had hired an attorney “to protect the answer date or has it just been reported to 22 [Defendants]?” Id. ¶ 77. 23 On August 2, 2017, Innovative Risk Management issued a letter acknowledging 24 25 26 1 The third-party defendants in the Underlying Matter moved to dismiss these third-party complaints and the Court denied these motions, except with respect to the claims for attorney’s fees under CA law. Cox 27 1 the claims against Plaintiffs in the Underlying Matter, and on the same day, Occidental 2 denied coverage on the basis of the Pollution Exclusion from the Policies. 3 On July 30, 2018, Plaintiffs’ counsel responded to the denial letter, providing 4 additional information as to why the Pollution Exclusion was inapplicable since no party 5 in the Underlying Matter had alleged that Plaintiffs were involved in any environmental 6 pollution event. Id. ¶ 81. As of the date of the filing of the FAC, Occidental had not 7 responded to this communication from Plaintiffs’ counsel. Id. ¶ 83. 8 Plaintiffs allege that they have incurred substantial attorneys’ fees and costs as a 9 result of defending the Underlying Matter, and Defendants’ denial of insurance coverage 10 forced Plaintiffs to forego benefits that they were entitled to under the Policies. Id. ¶ 87- 11 89. Plaintiffs have entered into a tentative settlement of the Underlying Matter, and this 12 settlement is subject to further negotiations between Ametek and the Putative Underlying 13 class. Id. ¶ 90-92. Plaintiffs allege that their decision to enter into this settlement was a 14 consequence of Occidental’s failure to defend, since Plaintiffs were required to pay out- 15 of-pocket defense fees and costs, which are in excess of $75,000. Id. ¶ 98, 99. Plaintiffs 16 additionally argue that Occidental’s denial of coverage was “designed to force Plaintiffs 17 to forego benefits under the respective policies.” Id. ¶ 102. 18 Plaintiffs allege causes of action for breach of contract based on Occidental’s 19 failure to defend and failure to indemnify; breach of implied covenant of good faith and 20 fair dealing for failure to defend and failure to indemnify; and declaratory relief. 21 Defendants move to dismiss on all counts. 22 DISCUSSION 23 Federal Rule of Civil Procedure (“Rule”) 12(b)(6) permits dismissal for “failure to 24 state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). Dismissal 25 under Rule 12(b)(6) is appropriate where the complaint lacks a cognizable legal theory or 26 sufficient facts to support a cognizable legal theory. See Balistreri v. Pacifica Police 27 Dep’t., 901 F.2d 696, 699 (9th Cir. 1990). Under Rule 8(a)(2), the plaintiff is required 1 only to set forth a “short and plain statement of the claim showing that the pleader is 2 entitled to relief,” and “give the defendant fair notice of what the . . . claim is and the 3 grounds upon which it rests.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). 4 A complaint may survive a motion to dismiss only if, taking all well-pleaded 5 factual allegations as true, it contains enough facts to “state a claim to relief that is 6 plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 7 550 U.S. at 570). “A claim has facial plausibility when the plaintiff pleads factual 8 content that allows the court to draw the reasonable inference that the defendant is liable 9 for the misconduct alleged.” Id. “Threadbare recitals of the elements of a cause of 10 action, supported by mere conclusory statements, do not suffice.” Id. “In sum, for a 11 complaint to survive a motion to dismiss, the non-conclusory factual content, and 12 reasonable inferences from that content, must be plausibly suggestive of a claim entitling 13 the plaintiff to relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009) 14 (quotations omitted). In reviewing a Rule 12(b)(6) motion, the Court accepts as true all 15 facts alleged in the complaint, and draws all reasonable inferences in favor of the 16 plaintiff. al-Kidd v. Ashcroft, 580 F.3d 949, 956 (9th Cir. 2009). 17 I. Breach of Contract – Duty to Defend 18 Occidental argues that it had no duty to defend Plaintiffs because there is no 19 potential for coverage of Plaintiffs’ claims due to the pollution exclusion clauses in the 20 Policies’ as articulated in both Coverage A and Coverage B. Plaintiffs counter that they 21 are entitled to coverage under the Policies because the Policies are silent on whether the 22 pollution exclusion clauses can apply regardless of the location of the environmental 23 pollution event and the insured’s lack of involvement with causing the pollution, and in 24 the face of this ambiguity, the contract must be construed against Occidental. 25 Under California law, the elements required for a cause of action for breach of 26 contract are: (1) the existence of a contract, (2) plaintiffs’ performance or excuse of 27 nonperformance, (3) defendant’s breach, and (4) resulting damages to plaintiff. Reichert 1 v. General Ins. Co., 442 P.2d 377 (Cal. 1968); McDonald v. John P. Scripps 2 Newspaper, 210 Cal.App.3d 100, 104 (1989). “Interpretation of an insurance policy is a 3 question of law and follows the general rules of contract interpretation.” MacKinnon v. 4 Truck Ins. Exch., 31 Cal. 4th 635, 647 (2003) (citing Waller v. Truck Ins. Exchange, Inc., 5 11 Cal.4th 1, 18 (1995)). “The fundamental rules of contract interpretation are based on 6 the premise that the interpretation of a contract must give effect to the ‘mutual intention’ 7 of the parties.” Id. “Such intent is to be inferred, if possible, solely from the written 8 provisions of the contract.” Id. 9 A liability insurer owes a broad duty to defend its insured against claims that create 10 a potential for indemnity. Montrose Chemical Corp. of Cal. v. Superior Court, 6 Cal.4th 11 287, 295 (1993) (en banc). The existence of a duty to defend turns upon the facts known 12 to the insurer at the inception of the lawsuit, not upon the ultimate adjudication of 13 coverage. Id. (quoting Saylin v. Cal. Ins. Guarantee Ass'n, 179 Cal.App.3d 256, 263 14 (1986)); Aetna Cas. & Sur. Co. v. Centennial Ins. Co., 838 F.2d 346, 350 (9th Cir.1988)). 15 The duty to defend arises if the facts known to the insurer indicate a potential or 16 possibility for indemnity. Montrose, 6 Cal.4th at 300. An insurer has no duty only if, at 17 the time of its decision, it can prove that the claim cannot fall within policy coverage. Id. 18 a. Pollution Exclusion 19 The parties disagree as to whether the Pollution Exclusion clauses in both 20 Coverage A and Coverage B exclude the Underlying Matter from coverage. 21 Exceptions to the performance of the basic underlying contract obligation must be 22 clearly stated to apprise the insured of the effect of those exceptions. Gray v. Zurich 23 Insurance Co., 65 Cal.2d 263, 269 (1966). “Whereas coverage clauses are interpreted 24 broadly to afford the greatest possible protection to the insured, exclusionary clauses are 25 construed narrowly against the insurer.” Cont'l Cas. Co. v. City of Richmond, 763 F.2d 26 1076, 1079 (9th Cir. 1985). Therefore, “[a]ny doubt as to whether the facts give rise to a 27 duty to defend is resolved in favor of the insured.” Legarra v. Federated Mut. Ins. Co., 1 35 Cal. App. 4th 1472, 1479 (1995). “Courts may not rewrite the insurance contract or 2 force a conclusion to exact liability where none was contemplated.” Id. at 1480. An 3 insurer may select the risks it will insure and those it will not, and a clear exclusion will 4 be respected. Howell v. State Farm Fire & Casualty Co., 218 Cal.App.3d 1446, 1467 5 (1990). 6 First, it is undisputed that “pollutant” covers the chemicals at issue in the 7 underlying claims – i.e., trichlorethylene, dichlorethene, dioxane, and trichloroacetic acid. 8 ECF No. 11-1 at 18. The parties, however, dispute whether the relevant pollution 9 exclusions from both Coverage A and Coverage B preclude insurance coverage of the 10 Underlying Matter. Defendants argue that Coverage A and/or Coverage B’s pollution 11 exclusions apply to this case and that the key language from both exclusion clauses (i.e., 12 “but for” and “arising from”) should be broadly construed, and furthermore that the 13 exclusion does not require that the act of pollution (i.e., discharge, seepage, etc.) take 14 place by a specific actor, including the insured. ECF No. 11-1 at 18. Plaintiffs counter 15 that there is no plain, clear, or conspicuous language in the exclusion that reflects “in an 16 unmistakable manner” that the exclusion will apply to an “(a) offsite release, (b) where 17 the insured did not cause the pollution condition, and (c) the pollution is unrelated to the 18 insured’s business activities.” ECF No. 16 at 14. 19 i. Coverage A 20 As described above, Coverage A’s Pollution Exclusion clause states that the 21 insurance does not apply to bodily injury or property damages “which would not have 22 occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, 23 migration, release or escape of ‘pollutants’ at any time.” FAC ¶ 23 (emphasis added). 24 Plaintiffs argue that this exclusion does not make clear that it applies to offsite activities 25 or to acts that are independent of the insured’s operations. 26 The Defendants rely on Garamendi v. Golden Eagle Ins. Co., 127 Cal. App. 4th 27 480 (2005), to support their argument that the “but for” language provides a clear 1 coverage exclusion. In Garamendi, the court held that a pollution exclusion which 2 provided that the insurance did not apply to bodily injury which would not have occurred 3 in whole or part “but for” the act of pollution indicated that this exclusion was “far 4 broader” than a prior exclusion that used “arising out of” language. Id. at 487. The court 5 found that the “but for” language shifted the focus from actions taken to injuries that 6 would not have occurred “but for” the discharge of pollutants. Id. As a result, the 7 exclusion encompassed products liability claims since the injuries at issue would not have 8 occurred “but for” the discharge of the pollutant. Id. at 488. Here, Coverage A’s 9 Pollution Exclusion extends a similarly broad reach and excludes coverage for damages 10 that would not have occurred “but for” the discharge of the pollutant. 11 Parties also disagree as to whether the deletion of the phrase “at or from” in 12 Coverage A’s pollution exclusion clause broadens or narrows its scope. The Garamendi 13 court noted that the use of “but for” created a “far broader” exclusion clause than the 14 version that encompassed only “bodily injury . . . at or from any premises, site or 15 location” owned by the insured. Id. at 487 (emphasis added). Therefore, the Court finds 16 that the use of the phrase “but for” is decisive in determining that the scope of the 17 pollution exclusion clause is broad enough to encompass the allegations against Plaintiffs 18 in the Underlying Matter. Since Coverage A’s pollution exclusion clause, as drafted, 19 focuses on the injuries that were sustained, rather than the site of pollution, the clause 20 clearly encompasses the claims brought against Plaintiffs in the Underlying Matter, 21 regardless of whether the damages were due to offsite discharge or independent of the 22 insured’s operations. Accordingly, the Court finds that Defendants did not have a duty to 23 defend based upon Coverage A. In the section that follows, the Court considers the 24 whether there was a duty to defend under Coverage B. 25 ii. Coverage B 26 Defendants next argue that the Court should construe the “arising out of” language 27 in Coverage B similar to the “but for” language. However, this position is wholly 1 unsupported under California law. 2 Defendants cite Cont’l Cas. Co. v. City of Richmond, 763 F.2d 1076 (9th Cir. 3 1985) for the proposition that “arising out of” language is as broadly construed as the 4 “but for” exclusion in Garamendi. ECF No. 11-1 at 21-22. In Cont’l Cas. Co., the 5 question considered by the Ninth Circuit was distinct from the question presented here. 6 The Cont’l Cas. Co. complaint alleged that police officers assaulted and beat the 7 plaintiffs’ father to death, and that this conduct was part of a pattern and practice of 8 police brutality caused by the City’s failure to properly train its employees. Id. The 9 plaintiffs brought due process, equal protection, and excessive force claims based on the 10 alleged wrongful death of their father. The Ninth Circuit held that the wrongful death 11 allegations “arose out of” alleged bodily injury and wrongful death, and therefore were 12 excluded under the applicable exclusionary clause in the policy which provided that the 13 insurance company “would not be liable on any claim arising from the bodily injury, 14 assault, battery, or death of any person.” Id. at 1078. 15 Here, the causal chain between the allegations in the Underlying Matter and 16 Plaintiffs’ liability is far more attenuated than the chain in Cont'l Cas. Co. since the 17 claims against Plaintiffs are based on Plaintiffs’ failure to act on their knowledge of the 18 pollution, rather than their alleged contribution to the act of pollution itself. Occidental 19 has not cited, any case law counseling a broad approach to the phrase “arising out of” in a 20 context similar to the situation in the present litigation. Moreover, as noted in the 21 previous section, the Garamendi court has recognized that “but for” exclusions provide a 22 far broader reach than “arising out of” exclusions. This holding supports a narrow 23 reading of “arising out of” in Coverage B in a constrained manner against the insurer. 24 In addition, Coverage B can be better analyzed through the lens of MacKinnon, 25 where the California Supreme Court held that a landlord’s use of pesticides at the tenant’s 26 request did not qualify as the type of environmental pollution that should be excluded 27 from coverage since the applicable pollution exclusion clause did not “plainly and 1 clearly” exclude the landlord’s conduct from coverage. In making this decision, the 2 MacKinnon court “declined to extend the [pollution] exclusion beyond” the “arena” of 3 potential liability arising from “the gradual or repeated discharge of hazardous substances 4 into the environment.” Id. at 646. 5 Occidental argues that MacKinnon does not help Plaintiffs because the MacKinnon 6 court was only concerned with the questions of whether the type of hazardous substance 7 qualifies as pollution and whether the geographical scope of the contamination merits 8 exclusion from insurance coverage, but did not consider the questions relevant this 9 instant litigation – i.e., whether the exclusion applies to pollution where the insured did 10 not engage in the polluting. Moreover, Occidental argues that MacKinnon’s reasoning 11 applied to the current litigation would cut against Plaintiffs since the plume clearly 12 involved hazardous substances and the geographical scope of the Plume’s pollution was 13 significant in size. ECF No. 11-1 at 25. 14 However, Occidental has failed to reckon with the MacKinnon court’s overarching 15 encouragement for courts to adopt a reading of the case as it could be understood by a lay 16 person and avoid adopting an interpretation of the pollution exclusion that would lead to 17 “absurd results.” MacKinnon, 31 Cal.4th at 640. Here, the Pollution Exclusion in 18 Coverage B goes to great lengths to define the nature of the pollution as the “actual, 19 alleged or threatened discharge, dispersal, seepage, migration, release or escape of 20 ‘pollutants.’” FAC ¶¶ 23, 27. Adopting a lay person’s reading of this exhaustive list, the 21 language of the Coverage B Pollution Exclusion is tailored to address the act of the 22 polluter. In MacKinnon, the court specifically noted that “certain acts of ordinary 23 negligence” should be covered by the insurance policy unless the pollution exclusion 24 “conspicuously, plainly and clearly apprises the insured that certain acts of ordinary 25 negligence . . . will not be covered.” Id. at 649 (emphasis added). Here, the language of 26 the pollution exclusion does not conspicuously, plainly, or clearly apprise Plaintiffs that 27 their failure to notify the residents of the Subject Insured Property of pollution would be 1 encompassed by this exclusion. In the Underlying Matter, the third-party complaint 2 alleges that Plaintiffs had a duty to “deal honestly with [the residents] . . . in negotiating 3 lease agreements and disclosing information or concerns.” FAC, Ex. G at 921.2 4 Therefore, if the Court were to adopt a reading of the exclusion that Defendants offer, the 5 Court would be at risk of extending the pollution exclusion beyond a layperson’s 6 understanding of the pollution exclusion. The Court finds there was a duty to defend 7 based upon Coverage B and therefore DENIES Defendant’s motion to dismiss. 8 1. Context of Operations and Intent of the Exclusion 9 Parties additionally disagree as to whether and how the Court should consider the 10 context of the insured’s operations and the intent of the pollution exclusion clause. 11 Plaintiffs argue that the since pollution exclusion clause does not specify that it covers 12 offsite discharge or activities that are independent of insured’s operations, it should not 13 apply here. Plaintiffs cite several out-of-state cases and argue that their reasoning is in 14 line with MacKinnon since the MacKinnon court explained that pollution exclusions 15 apply to “traditional environmental events that the insured be involved in the polluting 16 activity in the absence of language to the contrary.” ECF No. 16 at 27. 17 Out-of-state courts are divided on the matter. In addition to the cases that Plaintiff 18 cites (ECF No. 16 at 26-27), the Court also considers Payne v. U.S. Fid. & Guar. Co., 19 625 F. Supp. 1189, 1193 (S.D. Fla. 1985) where an insured property owner knew that 20 their property was polluted but did not attempt to control or contain the spread of the 21 pollutants. The Payne court found that the owner was still entitled to insurance coverage 22 (despite the presence of a pollution exclusion clause) since, as the court pointed out, it 23 was not alleged that the insureds were commercial or industrial enterprises, that they 24 generated the hazardous substances, or disposed such substances as a natural and usual 25

26 2 Due to the illegibility of the ECF pagination, the pagination referred to here is the internal Bates page 27 1 part of its business. Id. (“Because the pollution did not result from the regular course of 2 the insured's business” the pollution was not excluded from coverage).3 3 Defendants counter by citing two New York state cases where the pollution 4 exclusion precluded coverage, even where the policyholder was blameless in causing the 5 pollution: Budofsky v. Hartford Ins. Co., 556 N.Y.S.2d 438 (Sup. Ct. 1990) and Town of 6 Harrison v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 89 N.Y.2d 308 (1996). 7 However, in Budofsky, the court noted that the pollution exclusion specifically stated that 8 the insurance would not apply to pollution damages to the premises owned by the 9 insured. Budofsky, 556 N.Y.S.2D at 440. The Harrison court similarly noted that the 10 coverage was “unambiguously excluded” for claims generated by the dumping of waste 11 materials onto complainants' properties. Harrison, 89 N.Y.2d at 316. 12 Ultimately, since the Court has already denied the motion to dismiss on the basis of 13 the reasoning above, the questions of the context of insured’s operations and the pollution 14 exclusion’s intent are not determinative. However, the Court nevertheless notes that 15 Plaintiffs’ position is generally supported by the historical analysis provided in 16 MacKinnon regarding the general intent of the inclusion of pollution exclusion clauses. 17 The MacKinnon court included an instructive historical analysis of the development of 18 the pollution exclusion clause, noting that it developed as a result of the implementation 19 of more stringent anti-pollutions laws between 1966 and 1980, which put further pressure 20 on insurance underwriters as they dealt with environmental clean-up and disasters claims. 21 MacKinnon, 73 P.3d at 1210. In light of these enhanced pollution standards, the court 22 explained, insurance companies began to tailor their policies to exclude pollution-related 23

24 25 3 Plaintiffs cite Griffin Dewatering Corp. v. N. Ins. Co. of New York, 176 Cal. App. 4th 172, 201 (2009), noting that there the court held that the pollution exclusion did not apply where the insured was not 26 involved in the pollution activity. However, the Griffin court did not base its analysis on the insured’s lack of involvement in the act of pollution, but instead focused on the insurer’s reasonable denial of 27 1 |/injuries. 7d. Plaintiffs argue that the overall policy within the insurance industry shows 2 || that the intent of pollution exclusions generally is to prevent coverage for persistent 3 || polluters and to penalize the polluters who handled toxic materials without proper 4 || precautions. ECF No. 16 at 27-30. Occidental, however, counters that insurance policies 5 || have excluded coverage for earthquakes or floods and therefore Plaintiffs’ reasoning does 6 ||not apply. ECF No. 17 at 8. In light of this historical analysis provided in MacKinnon, 7 Court is inclined to agree with Plaintiffs in that Coverage B’s pollution exclusion was 8 ||intended to exclude the acts of persistent polluters and the Court would therefore be 9 || expanding the historical intent of the pollution exclusion clause by including the acts of 10 || parties that did not engage in any act of pollution. 11 Other Claims 12 Occidental argues that Plaintiffs’ causes of action on the duty to indemnify must 13 || also be dismissed since they rely on a finding of a duty to defend; that Plaintiffs’ third 14 |/ and fourth causes of action for breach of implied covenant of good faith and fair dealing 15 ||should be dismissed because Occidental did not breach the policy; and that the fifth cause 16 || of action for Declaratory Relief should also be denied since there is no actual controversy 17 since Occidental did not have a duty under the Policies. Since the Court has denied the 18 || motion to dismiss with respect to the question of Occidental’s duty to defend, the motion 19 |/to dismiss as to the other causes of action is also DENIED. 20 21 22 IT IS SO ORDERED. 23 Dated: February 28, 2020 (2 24 Hon. athe Cae 5 United States District Judge 26 27 28