Santa Clara Waste Water Company v. Allied World National Assurance Company

In Santa Clara Waste Water Company v. Allied World National Assurance Company, 18 Cal. App. 5th 881 (2017), the Second Appellate District for the California Court of Appeal affirmed the trial court’s order granting Allied World National Assurance Company’s (“Allied”) application for prejudgment attachment, rejecting Santa Clara Waste Water Company (SCWW”) and Green Compass Environmental Solutions, LLC ‘s (“GCES”) contention that Allied did not show sufficient probable validity of its claims.

The Court summarized the pertinent facts:

SCWW owned a wastewater treatment facility in Santa Paula. GCES, a subsidiary company owned by SCWW, operated a trucking unit that transported wastewater. SCWW and GCES applied for insurance coverage with Allied. In their insurance application and related correspondence, SCWW and GCES represented that they did not accept, process, transport, or discharge hazardous waste.

Allied issued a $2 million “Primary Environmental Liability Policy” and a $5 million umbrella policy. The policy covered “‘environmental damage’” or “‘emergency response expenses’” arising out of a “‘pollution incident.’” The policy also contained an “intentional noncompliance” provision, which excluded coverage for damages resulting from the “intentional disregard of or deliberate willful or dishonest noncompliance” with law or regulations.

After obtaining coverage, a GCES vacuum truck exploded at the SCWW facility when a truck driver mixed wastewater with a chemical (sodium chlorite). Chemical spillage from the explosion spontaneously combusted and caused a fire. SCWW submitted a claim to Allied to cover the cleanup costs. Allied did not pay the claim.

The parties entered mediation and reached a partial settlement including a “Payment Term Sheet.” The Payment Term Sheet provided that Allied would pay $2.5 million to SCWW, but if Allied obtained a judgment that it was not obligated to pay SCWW's damages under its policy, then SCWW would reimburse Allied. Allied paid the $2.5 million.

SCWW then sued Allied, alleging a failure to pay damages up to the policy limit. Allied filed a cross-complaint, asserting various causes of action including unjust enrichment and rescission.

Allied filed applications for a right to attach order and writ of attachment against both SCWW and GCES for $2.5 million plus costs and interest based on an express contract (the Payment Term Sheet) and implied contract theories of unjust enrichment and rescission. In support of its applications, Allied presented evidence showing that the intentional noncompliance policy exclusion applied because SCWW and GCES violated laws and regulations when they stored and concealed the presence of sodium chlorite at the facility. Allied also presented evidence showing that the policy should be rescinded because SCWW and GCES misrepresented that they did not accept, process, transport, or discharge hazardous waste.

The trial court granted the applications, finding that Allied “established the probable validity of its implied contract and rescission claims.” Specifically, it found the evidence supported the “applicability of the ‘intentional noncompliance’ policy exclusion, and the existence of hazardous waste discharge prior to the policy application.” The court issued writs of attachment against both SCWW and GCES.

The Court disagreed with SCWW and GCES’s contention that the trial court erred, as Allied did not establish the probable validity of the claims. The Court noted that a party seeking prejudgment attachment “must demonstrate the probable validity of its claim” and that such probable validity “means that ‘more likely than not’ the plaintiff will obtain a judgment on that claim.’” An order granting such an application is directly appealable, with the standard of review being substantial evidence.

The Court found Allied did establish the probable validity of its unjust enrichment claim as an insurer has an implied-in-law right to reimbursement for amounts paid that are not covered under the policy. The Court determined the intentional noncompliance exclusion applied, under which Allied was not obligated to provide coverage for damages resulting from SCWW and GCES’s intentional noncompliance with law and regulations.

SCWW and GCES failed to comply with law and regulations when they stored sodium chlorite at the facility. They were required to report and update a “Hazardous Materials Business Plan” within 30 days of receiving a 275-gallon container of sodium chlorite. (Health & Saf. Code, § 25508.1.) They did not do so.

Moreover, SCWW and GCES failed to comply with the law when they concealed chemicals from inspectors. Employees testified that they consolidated and cleaned chemical totes before inspections to hide the presence of unreported chemicals at the facility. Employees removed labels from chemical totes that identified their contents or indicated they were hazardous materials. SCWW's environmental compliance manager admitted that he ordered employees to move unreported chemicals to a trucking yard before an inspection in order to hide them from the inspectors. The storage of these chemicals at the trucking yard violated SCWW's lease with the City of Santa Paula.

The cleanup costs resulted from SCWW and GCES's intentional noncompliance with law and regulations. Moments before the explosion, a truck driver was cleaning sodium chlorite totes to prepare for an inspection the next day. Because the presence of sodium chlorite was unreported, it was illegally stored at the facility and should not have been present. The explosion and fire occurred when wastewater mixed with sodium chlorite. Thus, the unreported presence of sodium chlorite was the cause of the explosion and fire.

Because the evidence supports the trial court's finding that the intentional noncompliance exclusion applies, the trial court properly found that Allied established the probable validity of prevailing on its unjust enrichment claim.

While finding “the unjust enrichment claim alone is sufficient to support an order for prejudgment attachments, Allied also established the probable validity of its rescission claim.” An insurer may rescind a policy where there is misrepresentation or concealment of material facts in connection with an application. Whether a fact is material is determined based on the “probable and reasonable” effect that fact would have had on the insurer. Allied asked questions regarding hazardous waste in the application, and an executive of Allied declared Allied would not have issued the policy as written had SCWW disclosed its handling of hazardous wastes (including that Allied would not have added GCES under the umbrella policy had it known of its transportation of hazardous waste). The Court found:

Substantial evidence supports the finding that SCWW and GCES misrepresented and concealed this material fact. The evidence showed that SCWW and GCES accepted, processed, and transported wastewater regardless of whether it tested positive as hazardous. For instance, before Allied's policy was in effect, SCWW ordered a wastewater sample to be retested after it tested positive for “corrosivity.” The proper action was to identify the wastewater as hazardous and reject it, but SCWW ordered the sample to be retested. In another instance, when SCWW retained a lab to produce reports to send to regulatory agencies, it ordered the lab not to send any reports of wastewater samples with a pH level above 12.5 (which indicated hazardousness). Other evidence shows that SCWW accepted and transported wastewater knowing that it exceeded a pH of 12.5.

Additionally, the evidence shows that SCWW discharged wastewater that it knew was hazardous. SCWW's environmental compliance manager admitted that he altered lab results of wastewater that was discharged into pipelines connected to the Oxnard water treatment facility to reflect levels of pollutants below the pollutant discharge limit.

The evidence shows that SCWW and GCES's misrepresentations both preceded and followed the effective date of coverage. The dates on the lab results reflect that SCWW altered results even before Allied's policy was in effect. After the policy went into effect, but before the explosion incident, the City of Oxnard sent SCWW a cease and desist letter because tests revealed that wastewater being discharged into pipelines violated the discharge limits under SCWW's industrial wastewater discharge permit.

The Court rejected SCWW and GCES’s procedural argument that Allied did not assert a claim for rescission on its applications, pointing to where Allied stated in the applications that “it based its applications for prejudgment attachment ‘under two implied contract theories: unjust enrichment and rescission.’”

SCWW and GCEW argued Allied did not provide proper notice and did not offer to restore premiums with respect to the rescission claim. The Court found filing the action was sufficient to meet those requirements.

SCWW and GCEW argued there was insufficient evidence that the wastewater was hazardous. The Court found that not only was this argument forfeited because it was not raised in the trial court, but also the lab results and the cease and desist letter showed the discharge exceeded pollutant discharge limits.

Similarly, SCWW's contention that Allied could not prevail on implied contract theories where there was an express contract failed not only because it was raised for the first time on appeal, but also on the merits.

The trial court did not err in granting the applications for prejudgment attachment based on implied contract theories even if an express contract covers the same subject. First, SCWW and GCES cannot assert the existence of an express contract when they successfully argued for the exclusion of that contract from evidence. Under the invited error doctrine, a party cannot challenge a court's finding made at its insistence. [Citation.] Here, SCWW and GCES argued that the Payment Term Sheet was inadmissible and was not an express contract on which the applications for prejudgment attachment can be based. They raised an evidentiary objection to the Payment Term Sheet, which the trial court sustained. Because the court excluded the Payment Term Sheet at their request, they are barred on appeal from asserting that the trial court failed to consider the Payment Term Sheet.

Moreover, even if the Payment Term Sheet is a valid express contract, the court properly granted the applications for prejudgment attachment based on implied contract theories. An attachment may be granted if a party shows the probable validity of the claim on a contract that is either express or implied. [Citation.] All that is required is proof that the amount is due based on a contract. [Citation.] Where there is both an express and implied contract, relief is available under an implied contract if the material terms do not conflict with the express contract. [Citation.] Here, the material terms of the Payment Term Sheet and the implied contract are the same—that the $2.5 million Allied paid would be reimbursed if the policy did not cover SCWW and GCES's cleanup costs.

SCWW and GCES next contended that the order granting the applications was improper, as judgment was a condition precedent. The Court found this argument also lacked merit as Allied was only required to establish “probable validity” of its claims, not actual validity. The Court noted “[a]n attachment remedy would be useless if it required the court to first decide the merits and issue a judgment.” The Court found SCWW and GCES’s reliance on Robinson v. Varela, 67 Cal. App. 3d 611 (1977) to be misplaced: Allied only needed to establish the probability the policy would not cover the damages, which it did by showing the noncompliance policy exclusion applied, and that SCWW and GCES misrepresented and concealed material facts.

The Court turned to SCWW and GCES’s contention that prejudgment interest “should be calculated from the date of the judgment awarding reimbursement, and not from the date Allied paid $2.5 million.” Again, the Court found this claim was forfeited as it was not made below. However, the Court also rejected this argument on its merits: “Prejudgment interest begins to accrue from the date Allied paid the $2.5 million because interest is owed from the time the obligation to pay money begins, even if judgment awarding the reimbursement is decided on a later date.” The Court determined “[t]he trial court properly calculated prejudgment interest from the date Allied paid $2.5 million.”