It is true that the purpose of umbrella policies is to provide broader coverage than the underlying coverage and to drop down or step down and fill in any gap created by a loss that is not covered by the underlying insurance. We generally conceive of this gap- filling function as ensuring that the policyholder does not fall between two stools, when for example neither an auto policy nor a homeowners' policy applies to some strange loss involving an automobile. Nothing in the language of umbrella policies limits their coverage to these types of gaps, and the California Supreme Court apparently had no trouble at all concluding that indemnification for expenses naturally includes clean-up costs in state administrative actions, even though the underlying coverage -- which indemnifies "only" for "damages" -- does not apply. As the Powerine court explained, "We therefore conclude that under a literal reading of Central National's excess/umbrella policies, the indemnification obligation is expressly extended beyond court-ordered money 'damages' to include expenses incurred in responding to government agency orders administratively imposed outside the context of a government lawsuit to cleanup and abate environmental pollution." (Slip op. at 23)

But this was not the result for the County of San Diego, because though its policies used the term "expenses" in the "ultimate net loss" provision (thus making clear the policy indemnifies for "expenses" and indicating how the policy limits were to apply), the word "expenses" was located in the wrong place as far as the Calfornia court was concerned. As the court explained [sic] in italicized language no less: "In contrast, the defintion of 'ultimate net loss' here is neither incorporated into, referenced, nor a part of the central insuring clause of the [] policy." (Slip op. at 14, original italics omitted). Accordingly, the court holds:

We conclude that costs and expenses associated with responding to administrative orders to clean up and abate soil or groundwater contamination outside the context of a government-initiated lawsuit seeking such remedial relief, and property buy-out settlements negotiated with third party claimants outside the context of a court suit, do not fall within the literal and unambiguous coverage terms of the [] policy's insuring agreement.

Slip op. at 16 (emphasis in original). Three of the six current California Supreme Court justices, however, indicated their disagreement with the merits of the holding of the opinion for the court.

The three dissenting justices no doubt are right (in my judgment) that it is, shall we say, quirky to have the case law end up where it is as of yesterday. In some ways, a more rational result would have been to deny coverage to Powerine, too, at least to accomplish some degree of aesthetic consistency (and lest there be any misunderstanding I think the original ruling by the court in the earlier case limiting coverage to amounts awarded in court, was plainly wrong). Now, at least in California, we need to scrutinize policies not just for the word "expenses" but also for its coordinates within the policy.

There is an important, broader implication of this duet of opinions: policyholders need to be vigilant in notifying umbrella carriers (and presumably the following-form tower) whenever some form of unconventional relief, i.e., other than pure compensatory damages, is sought against it, whether it be in a court proceeding or in an administrative proceeding. Accordingly, a claim for medical-monitoring, which some insurers have challenged as "non-damages", should be noticed to the umbrella carriers to guard against the risk that those amounts might be considered to be "expenses" rather than "damages" (no matter how unreasonable that result might be). Similarly, whenever a policyholder is interested in settling with a claimant prior to litigation, the policyholder should notify the umbrella carriers, for any such payment might (under current California authority) be found not to be covered "damages" either.

Of course, this all will create new burdens on umbrella carriers, who typically rely on the primary insurer for everyday claims handling. But according to the California Surpeme Court nowadays, we simply must assume the umbrella carrier had the contractual intent to cover claims settled before court proceedings start and forms of monetary relief other than traditional compensatory damages.